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02/05/2008

Microsoft/Yahoo: A Bad Deal For Silicon Valley: Take II

Marc Andreessen has posted a very thoughtful rebuttal to my argument (as well as Fred's and few others) that the Microsoft/Yahoo deal is a potentially a bad thing for Silicon Valley.  The funny thing is that I actually hadn't noticed the post yet in my feeds but it was brought to my attention by a number of people who were basically like "Oooo, you've been served!" and were wondering if I was going to challenge Marc to some kind of blog-off or something.

I hate to disappoint folks, but after reading Marc's post I actually agree with most of what he has to say, especially his overarching message to start-ups, which I took to be "Focus on building a great business and the exit will take of itself".  Marc also made a number of other good points around the M&A environment which if I could sum it up were basically "Hey, life will go on, other companies will try to take up the slack, it's not the end of the world."  In particular I think his point that a combined Microsoft/Yahoo may prompt some second tier firms to increase their M&A is a good one.  I also agree that over the long term, creating a big bureaucratic behemoth such as Microsoft/Yahoo is a good thing for start-ups because it means that start-ups will likely be able to dash ahead of the lumbering giant and secure fresh new areas of opportunity well before the folks at Microhoo file even their TPS reports and get out of their staff meetings.

That said, I still think that Microsoft's acquisition of Yahoo is still a net negative from an M&A perspective.  Yes, it's certainly not the end of the world, but on the whole and on the average it's never a positive thing to have an active, well endowed, acquirer removed from the mix.  Yahoo may not have been buying 50 start-ups a year, but they were still one of the most active Internet acquirers not just in terms of deals, but also in terms of bids.  Indeed the most important party in any deal is not the actual buyer but the second place bidder and Yahoo had seemed to make a career out of being the second place bidder lately.   Finally, thanks to its huge market capital, massive traffic and strong (although not relative to Google) monetization platform, Yahoo is one of the few Internet acquirers who have the luxury of being able to easily drop $50-$100M on a "feature" without really thinking about it.  I totally agree with Mark that if you are building a "feature" with the intent of getting acquired by Yahoo or whoever, you were likely doomed to failure a long time ago, but at same time, the cynic in me has seen a lot of "features" get funded in the valley over the past two years often under the assumption that if they get enough eyeballs one of the big three M&A fairies will swoop in and drop $100M just to "keep up with the Joneses".

So I agree that life will go on in the valley and there are some real positive non-M&A aspects of the deal for start-ups, but at the same time, I think net, net it's bad for the M&A environment.  That may change over time as new companies emerge to take up the slack, but over the next 24 months things could be a bit rough because not only will you have Microsoft and Yahoo thoroughly distracted,  but IAC is going to be a complete mess due its dispute with Liberty and AOL appears consumed with consummating its death spiral within Time Warner.  I am sure M&A bankers will do their best keep the deals flowing, but if you have an Internet start-up, given the turmoil within the big acquirers and the rapidly deteriorating economic environment, as Marc suggests, you should definitely just keep you head down on focus on building a real business.

February 5, 2008 in Internet, Venture Capital | Permalink

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