Merger won't solve Microsoft or Yahoo's problems

Microsoft's proposal to buy Yahoo! for $44.6 billion offers tremendous benefits - just not for Microsoft.

The deal would do virtually nothing to address the fundamental problem faced by both companies: finding a way to effectively challenge Google's growing dominance of the Web.

But it's a mighty nice gift to Yahoo's shareholders.

They would finally get a reasonably happy ending to their long nightmare of waiting for Yahoo management to come up with a viable strategy - or any strategy whatsoever - to repel the Google assault. Other than announcing a thousand job cuts this week, Yahoo co-founder and Chief Executive Jerry Yang has given no sign that he has any better ideas for turning around the struggling company than Terry Semel, who resigned in disgrace in June.

Before Microsoft made its $31-a-share offer, Yahoo's stock had fallen 44 percent in two years, to $19.18. On Friday, shares jumped 48 percent to close at $28.35. If the purchase goes through - and my prediction is that Yahoo's board will acquiesce after extracting a slightly higher price - Yahoo shareholders can cash out and invest their money in a successful Internet company.

Like, say, Google.

Ironically, the Mighty Mammoth of Mountain View would be a big winner from a Microsoft-Yahoo deal.

Sure, Microhoo (or Yahoosoft) would have more Web traffic than Google. In theory, that would give it an edge with advertisers, especially the display advertisers that are Yahoo's strength.

But as Microsoft and Yahoo waste a couple of years jumping through antitrust hoops and figuring out how to integrate their companies, Google will continue to add more business and consumer Web services and leverage its dominance of search advertising into yet more advertising arenas.

Google is already moving aggressively onto mobile phones, striking deals around the globe to get prominent positioning with certain carriers and promoting an open handset design. The company is even bidding billions of dollars to buy a chunk of U.S. wireless spectrum that it could use to launch its own mobile voice and data service.

A Microsoft-Yahoo combination certainly has some merits. Yahoo still sports the best consumer Web portal, My Yahoo, with tens of millions of loyal users. Microsoft's Windows operating system runs nine out of 10 desktop computers and a big chunk of the servers that power the Internet.

In theory, Microsoft might integrate the best services from each company, from Yahoo's Flickr photo-sharing to Microsoft's Office applications, to provide an appealing PC-and-Internet platform for customers. The technical challenges would be enormous, but the payoff could be huge.

However, Microsoft doesn't even seem to be thinking that way. In its news conference announcing the offer, executives of the Redmond, Wash., company sounded like they were talking about the steel industry, not software. They emphasized the merger's economies of scale: saving money on research and development, labor and equipment.

But Google doesn't dominate the Web because of huge R&D spending or cheap servers. Google leads because it took a simple interface and built it into a superior brand. And it relentlessly explores bold new ideas.

Buying Yahoo would also present Microsoft with a huge dilemma: how do you handle two powerful brands? Do you push Microsoft Hotmail or Yahoo Mail? Live Search or Yahoo Search? If Microsoft keeps both brands, it will confuse customers and reduce synergies. If it kills one, it will throw away a lot of expensively built equity.

Finally, there's the challenge of integrating two very different companies, with clashing cultures and business philosophies. At Microsoft, the operating system has always been king, while Yahoo is a creature of the Internet.

I think Yahoo's most talented employees will take the money from their suddenly valuable stock options and run. They aren't going to get rich working for Microsoft, whose stock has gone up an average of 6.6 percent a year over the last five years.

Microsoft's move is a Hail Mary play better suited to Sunday's Super Bowl.