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Integration Challenges

There were indications during Friday's news conference that Microsoft may not have taken the time to fully assess the magnitude of the integration complications. Despite Ballmer's assurances that he personally has thought "long and hard" about the Yahoo acquisition, there is evidently a level of urgency about the move, or else the deal wouldn't have been an unsolicited offer, as Yahoo has portrayed it.

If, as Ballmer indicated, the companies have been in on-and-off talks for about 18 months about a possible acquisition, it's fair to ask -- as a financial analyst did -- why they couldn't sit down privately and present, jointly, a more cooked deal. Basically, Ballmer admitted that Google keeps expanding its empire and time is of the essence.

"Any large integration process has risks associated with it. We've all thought about it. We could have hired [more] engineers, but at the same time the market continues to grow and the leader continues to consolidate positions and there's nothing quite like putting together two larger sophisticated R&D organizations," Ballmer said.

Along with the inherent opportunity to sell more ads, Nick Patience, managing analyst at The 451 Group, also sees a "potential integration headache" with having to integrate Microsoft's ad platforms -- AdCenter and aQuantive -- with Yahoo's. Patience is also skeptical about the possibility of merging search indexes, and believes that the search engines will most likely have to continue to operate independently. Overall, the integration work would represent for Microsoft "a step into the unknown," particularly since this would be by far the largest acquisition in Microsoft's history, Patience said.

Gartner analyst Allen Weiner also sees potential integration challenges, particularly because he doesn't think either organization has a powerful leader who can take the reins of the combined entity and lead it into the future. "They need someone like a Steve Jobs or a Bill Gates that has the charisma, vision, technical knowledge and consumer knowledge to lead," Weiner said.

On paper the acquisition has interesting potential, but it will all come down to how the integration is carried out, Weiner said. "It's all about the execution," he said. "The devil is in the details."

Despite numerous acquisitions over the past few years in advertising and Web 2.0 technologies, Yahoo has struggled to jump-start its business, said JupiterResearch analyst Michael Gartenberg. "At the end of the day, it hasn't all worked out for them," he said.

While Microsoft executives are stressing that a deal with Yahoo would give it the scale to compete with Google, wrapping the two companies' diverse technologies together won't be simple, Gartenberg said. "In order to get to that scale, you've got to be able to fit all those pieces and parts together," he said.

Despite the integration concerns, Microsoft has good processes in place for managing acquisitions of large companies, said Gartner analyst Mike McGuire. However, it will be key for Microsoft to quickly put a senior management team in place, as Google will continue to propel ahead as Microsoft sorts out the details. "They are going to have to start showing some traction, or at least a really solid vision for how they will combine the companies ... early on," McGuire said.

Matt Booth, a Kelsey Group analyst, thinks that the integration challenges will be major, but predicts that Microsoft will work through them methodically, starting on the back end and linking services in a way that, as much as possible, is transparent to end-users, be they advertisers, publishers or consumers. For services that are just too difficult to integrate, they will likely be kept separate. The last thing Microsoft wants to do is drive users away, Booth said.

In a research note, Citigroup financial analyst Mark Mahaney said he is skeptical that a combined Microsoft-Yahoo would improve its search products enough to affect Google's position, since they both have been losing search market share and, in his opinion, seeing a decrease in their search innovation.

"Given what would surely be immense integration challenges, it's hard for us to see how a Microsoft-Yahoo combination would create a greater technology competitor to Google at least for the foreseeable future," he wrote.

"We could see a scenario by which Google would actually gain more market share due to industry uncertainty over the integration of the deal," Mahaney added.