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the ongoing takeover battle between
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microsoft and yahoo has taken several
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surprising turns over the past few weeks
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after rejecting microsoft's unsolicited
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44.6 billion offer in late february
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yahoo has announced a two-week ad
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testing program with its main search
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rival google and has reportedly
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entertained a possible merger with time
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warner's aol
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meanwhile microsoft was rumored to be
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considering news corp as a possible ally
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in acquiring yahoo
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while spectators wait for the next twist
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in this saga another headline making
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deal has been announced a merger between
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delta and northwest airlines to become
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the world's largest airline
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knowledge at wharton spoke with wharton
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management professor psychot chodri and
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wharton legal studies professor kevin
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warbach to find out whether these deals
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make sense and for whom microsoft is
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basically giving yahoo three weeks to
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accept its current offer or face a proxy
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battle it's a very aggressive stance
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what do you think of this strategy
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psycho let's start with you
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well you know i think they've waited
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patiently for quite some time
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to see whether yahoo would come to the
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negotiating table
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and now they want to move things forward
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because this can't continue endlessly
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yahoo hasn't indicated
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any
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positive inclinations so far to come and
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negotiate so they're just putting
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forward
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this step in order to make sure there's
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some resolution either way
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i would tend to agree with that i don't
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i don't think microsoft can sit around
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forever and wait for yahoo's feelings to
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change or wait for something in the
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marketplace to change this is a pretty
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major strategic deal for microsoft and i
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think at some point they need to signal
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both to yahoo and its shareholders in
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the market
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that that's the way they feel about it
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and they're going to go forward if they
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can and try and close the deal
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by taking this tax does microsoft risk
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losing one of yahoo's key assets that is
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its talented employee base well i think
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that's why they were patient for so long
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and they were perhaps overly cautious
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in order to allow for yahoo employees to
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see that they're not taking a very
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aggressive approach
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i think after you know a few months pass
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everyone expects some movement to be
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there
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i'm also not sure um whether it's going
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to have a negative impact i mean you're
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absolutely right in that the sources of
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value are a lot in the people here as
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well as the customers that yahoo has but
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see yahoo hasn't performed up to
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expectations for some time now
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and i would imagine that there certainly
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is a very loyal group of supporters
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who sticks to terry yang no matter what
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but then there is also a group which is
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perhaps a little demoralized given that
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they don't see much movement and
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they may be willing to move forward in a
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deal as well and perhaps uh
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go forward with microsoft so i think
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it's it's the right move from that point
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of view
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yeah i was going to lose some important
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employees no matter what i mean these
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are people who don't want to work for
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microsoft it's they're people who think
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of microsoft as the evil empire and that
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that has nothing to do with the nature
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of the acquisition whether it's hostile
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or friendly
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um so i think frankly those those people
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will leave anyway
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um at this point you know if they want
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to close the deal they need to go on
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with it
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kevin how much at this point does it
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seem that pushing this deal through as a
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matter of um of ego for steve baumer
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um i wouldn't say ego i would say it's a
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very important deal personally for steve
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ballmer he's not going to be running
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this company forever bill gates has
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already stepped away recently from
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basically active involvement in
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microsoft you know ballmer is you know
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this is his last chance for a real
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signature move he understands that the
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industry is changing um and so i i don't
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think he had to make this deal but i
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think once he decided that this was a
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direction they were going to go it's his
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stamp on it so i think it's it's not
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just a matter of ego it's it's a matter
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of this is his last signature move in
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terms of how he's going to leave
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microsoft whether it's to ray ozzie or
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to whoever else comes after that
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i agree with that and i think that you
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know if anything microsoft's been
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criticized for not um taking more
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aggressive steps in the past to compete
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with google and and improve their
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presence on the internet and the web
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space and so forth and so now they
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decided that they're going to do a very
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credible serious move in that direction
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so
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there's a strong moving it towards this
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logical conclusion so i think it's about
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that it's very rational move in my
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opinion
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for them to do something because if you
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look at it both yahoo and microsoft
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combined could actually be some force
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against google and the internet
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especially the advertising space and
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alone they've been struggling for quite
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a few years now
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yeah i mean that's that's an important
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question in terms of just how successful
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the deal will be but in terms of the
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microsoft's approach
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they're a very aggressive very paranoid
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but very calculating company they don't
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do things just on emotions
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they do things because they really feel
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like it's in their interest
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well what do you think of uh of yahoo's
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highly publicized test
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of using google's adsense service on its
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site well first of all can you explain
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what they're hoping what the actual test
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is what they're doing with it and sort
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of what they might hope to get from it
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i'll let that first part go to kevin
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sure so so both yahoo and google uh have
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services that that monetize searching
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they they match advertisers who pay to
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be matched with people searching for
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different things on the internet
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google's
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search ad matching technology just works
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better than yahoos or anyone else's it
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converts more advertisers like it better
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yahoo did a sort of crash course project
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called panama to improve their service
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didn't really move the needle very much
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so this is partly just trying out a
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different uh technology that that
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everyone agrees is the the gold standard
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in the industry but obviously there's
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more to it than that in this current
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environment google is the competitor
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that that clearly microsoft is trying to
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buy yahoo in part to compete against um
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so it's definitely also a shot across
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the bow yeah and you know i mean yahoo's
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been trying to search for
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other alternative
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options
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in the last couple of months ever since
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this offer came up
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so they're
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still searching for that option i think
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this is a tactic in that direction
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nothing has emerged very concretely no
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white knight has emerged or the
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alliances seem unlikely but nonetheless
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i think they are this is a credible
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signal that they are looking for
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exploring other opportunities
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and
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perhaps even hoping that this might
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increase the offer a little bit from
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microsoft to
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make a convincing case
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let's look at some of the other deals
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that are reportedly under consideration
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yahoo and time warner were reportedly
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talking about folding aol's internet
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operations into yahoo
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would that make sense
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i don't think it would be a more
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attractive option
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i think it's a way for aol
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to survive in that space but also for
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yahoo to stay independent so if you if
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you think about options where yahoo
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would be able to remain independent
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that's something which is can be taken
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fairly seriously and looks quite good
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but if you don't agree with the basic
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premise that yahoo can survive on their
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own
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then i think the microsoft offer looks
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much more attractive
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yeah and yahoo's view all along has been
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uh microsoft undervalues the company and
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it still has a lot of legs as a going
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concern as an independent business so i
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think shotgun is right
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aol and some of the other rumored deals
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getting news corp involved uh even the
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partnership with google are all
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ways that don't involve submerging yahoo
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into a larger entity as the microsoft
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deal would can we talk a little bit
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about microsoft this rumor about
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microsoft's teaming up with news corp
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what's that all about
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some sort of joint offer joint bid
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in the works perhaps to sweeten it for
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yahoo or you know maybe to help with the
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financing of the deal
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um i think honestly it would be very
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complicated um
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not perhaps to pull off from the point
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of view of striking a deal though that
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is one consideration but especially how
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would the you know post
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acquisition arrangement look like you
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know i i just am not comfortable with
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the idea from that point of view you
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know how would
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uh
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news corp then think about this who
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would own which piece and manage and
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influence what piece i
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i think it's a constellation which was
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thought about to perhaps make it more
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attractive or help perhaps increase the
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bid but it would be very
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complicated to implement
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yeah rupert burdock has a tremendous
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track record of basically injecting his
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company in a very effective strategic
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way into basically every
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aspect of the media landscape and every
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key transition and so they're they're
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very savvy and very smart
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they have some real important assets um
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yeah i'm also not clear that it's that
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that would make sense for either
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microsoft or yahoo
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but we have to remember we're at the
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sort of mating dance of the dinosaurs
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here these are all the big players see
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assets in play now that are valuable to
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them
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in the future of the digital economy so
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pretty much everyone is is mobilizing uh
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to get into this fight
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would the complexity of these deals be a
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severe handicap to the merger should it
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go through i mean surely it's a large
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deal with established players there's
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some hostility between them their
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competitors right now but if they can
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unite and rally around
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the common objective of successfully
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competing against google that might be a
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strong unifying force so i think if that
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need becomes clear to both sides which
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is very i think it's very clear to
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microsoft but if that need becomes clear
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to the yahoo employees as well they
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decide to stick in our conv and can be
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convinced
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that uh
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joining forces with microsoft would
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indeed be the right answer i think some
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of those challenges can be overcome and
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then of course you have to figure out
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common processes
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post-merger organizational structures
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in that i actually see an opportunity
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because microsoft could actually open up
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a strong presence in silicon valley
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should they choose so for instance
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instead of running the internet
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advertising operations out of redmond
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they could conceive of some sort of
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reverse integration where msn
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essentially would be folded into
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yahoo with a strong and a large office
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and presence in the silicon valley area
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that would also go some ways
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to alleviating the concerns that people
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have about oh here's that big giant big
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bad kind of player that comes in and
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brings everybody to redmond and stifles
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ideas if that's the perception that some
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have they could counter that as well
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both internally and externally so i do
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see some opportunities there as well
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yeah i don't really think any of that
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ultimately matters i think that both of
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these companies face a fundamental
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challenge that the industry is going
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through a transition and they're they're
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stuck
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uh you know on the outside chair in
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musical chairs microsoft is a software
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company yahoo is basically a an online
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new media company and the world is
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moving to web-based services basically
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the place where google right now is is
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at the center and dominating
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and they're both smart companies they
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have smart executives they understand
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that
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that's i think part of the reason that
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this deal is being bandied about i don't
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think the deal solves that problem i
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think it puts two companies together
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that have some complimentary assets and
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absolutely there there would be smarter
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ways to do the integration to to take
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advantage of it but fundamentally
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i don't see you know no matter how
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simple or complex it is how this deal
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gets the merge company to a point where
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they can really compete effectively in
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this new world
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so if you were steve ballmer what would
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you do kevin
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well i would certainly call the wharton
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school first and ask for our advice but
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um
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no i you know to the extent that he has
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made this call and who am i to second
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guess steve ballmer he's he's a
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brilliant extraordinary business
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executive
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um if they've gotten to this point of
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feeling that they need a yahoo that
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they've taken a look internally and said
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we are not going to make this transition
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from being a software company that
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builds you know package software
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and operating systems into a web-based
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services company because they've really
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been trying if the conclusion internally
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is we couldn't get there alone then by
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all means go for it i mean the yahoo is
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probably their best chance
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to actually change things even if
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outsiders like me are pessimistic
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they'll get there
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go for it give it a shot
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i agree i mean i think that uh microsoft
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needs to do something in order to
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strengthen its presence in that area
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this represents a fantastic opportunity
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they've started it so i think they
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should also for reputation's sake um
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given given that this is quite a
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rational move for them i think they
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should move towards its logical
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conclusion so let's flip the question
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so if you're jerry yang what would you
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do in this case try and squeeze out the
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best offer possible i think that you
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know he's doing some good tactical moves
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but i would start sending a few feelers
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out
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because at some point your own
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stakeholders and i'm saying not just
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shareholders but also other stakeholders
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such as some employees might begin to
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question
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why you're not you know trying to at
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least extract a good offer in the
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absence of alternative offers and also
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the fact that this does represent a good
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premium and a very good opportunity i
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would start doing it but of course you
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play the tactical game in order to
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squeeze out the best value that you can
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and move towards whatever evaluation
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they think is fair um for their side
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i think that's right he's in a very
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tough position look he co-founded this
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company it's an extraordinary
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entrepreneurial success story
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and yet he's got to see the writing on
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the wall and i don't think anyone i mean
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yahoo is still a growing profitable
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company has a lot of incredibly
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successful businesses tremendous number
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of users and so forth
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i think it's been enough time over the
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past few years to suggest that it's
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going to be hard for them to just
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pull out of the slide that they're in on
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their own and and so it's a difficult
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thing i think both personally and as a
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leader but i think he needs to
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make that transition whatever the
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outcome is whether it's microsoft or
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something else that helps the
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organization understand that so how do
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you think this is going to play out in
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the end
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i think microsoft wins in the end is
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there they're relentless and and again i
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can't think that they've come this far
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without having made the decision that
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this is a bet the company deal and if
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that's the case they're not going to
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give up until they win
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i agree i think that's going to be the
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outcome that
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microsoft buys yahoo great well let's
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turn to another merger that's making
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headlines
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the one between uh delta and northwest
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airlines
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does this merger make sense
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i'm happy to see it
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finally materialize and the reason is
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these airlines have been struggling for
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some time
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and
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you know with the oil prices being as
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high as they are
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they have to try and extract synergies
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um on the cost side in order to go
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anywhere
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um
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and i don't see oil prices coming down
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substantially
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so i think this is a new reality they
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have to deal with
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the reason i like this particular
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solution with northwestern delta is also
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because
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it's clean from the point of view that
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it's within an alliance
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and the complementarities are fantastic
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delta has a strong franchise in latin
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america and more recently they've built
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it up in the atlantic roots northwest is
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strong in the pacific routes so from
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that point of view i think they fit well
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together
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and there i think this will also lead to
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further consolidation but we can talk
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about that a little bit later sure
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yeah i don't have much to add to that
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i'm not an expert on the airline
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industry per se but but i will say it is
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another industry where scale matters uh
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probably even more so than in technology
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scale is very important in the microsoft
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yahoo deal but but with airlines there's
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just such extraordinarily high fixed
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costs i mean as i was saying the fuel in
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the planes and so forth um that that
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typically a you know an effective merger
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can actually create some economies of
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scale
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so that said are can we expect other
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mergers from the big carriers
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i think so i think what will happen now
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is that others are not going to sit back
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and and watch them be the largest
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carrier or potentially reap rewards now
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of course these integrations are going
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to be complex because
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unions are involved and uh and so forth
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but
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uh i think the next one that probably
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might uh occur is something like united
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with continental for similar reasons
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continentals built a bit of a
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an atlantic franchise they have an east
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coast presence they have a bit of latin
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america united is stronger on the west
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coast and has done some more on the
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pacific routes and in that case what you
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might it might work nicely because
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continental would then come or could
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then come into star alliance
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um
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because unlike delta they're not a
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founding member of sky team so they
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could come into star alliance which
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would work very well they'd be welcomed
00:17:09
because star lines especially lufthansa
00:17:11
and the others have really been looking
00:17:12
for a new york area hub
00:17:14
so that would work and then the question
00:17:16
though becomes if that were to happen
00:17:19
this is all hypothetical then will
00:17:21
american airlines sit back having been
00:17:23
the largest carrier or will it try and
00:17:24
do some kind of smaller deal
00:17:26
like u.s airways perhaps
00:17:30
but you know a lot of this is also
00:17:31
subject to regulatory approval so it's
00:17:34
not as though these are going to sail
00:17:35
through automatically it'll take six
00:17:37
eight months to get them approved and
00:17:38
there will be some redistribution of
00:17:40
hubs and assets and routes and so forth
00:17:43
so we kind of have to see it
00:17:45
collectively i think what
00:17:47
they'll do is basically a few of these
00:17:48
will be announced and then it'll all be
00:17:50
evaluated together to try and optimize
00:17:53
on a macro level
00:17:54
yeah the anti-trust review is going to
00:17:56
be very significant because this is
00:17:57
already an industry that's consolidated
00:17:59
a lot and and i agree it's potentially
00:18:01
going to consolidate a lot more
00:18:03
and that involves law but also politics
00:18:06
so it will depend uh almost certainly
00:18:08
who's in the white house next year and
00:18:10
what the posture is of their justice
00:18:11
department um and which deal goes first
00:18:14
um so a lot of that is hard to read
00:18:16
right now obviously we have a
00:18:17
presidential election coming up where
00:18:19
you know the outcome will have a
00:18:20
significant effect here
00:18:22
it's hard to see all the deals going
00:18:24
through on the other hand to the extent
00:18:26
a major deal like like the northwest
00:18:28
delta one goes through and and
00:18:31
again i'm not a an expert per say in
00:18:33
this area but it sounds like the
00:18:35
expectation is that it would um then
00:18:38
it's harder every every step down the
00:18:39
road for the justice department to say
00:18:42
this next deal is that much worse than
00:18:43
the previous one even if you look back
00:18:45
and it wasn't that long ago that we've
00:18:47
had airline mergers scuttled because of
00:18:48
regulatory review
00:18:50
now this merger announcement came after
00:18:53
four of the smaller airlines shut down
00:18:55
so are we going to see a lot more
00:18:56
fallout
00:18:58
you know among the smaller discount
00:19:00
carriers do you think cycad
00:19:03
yeah it's hard to say um what their
00:19:04
posturing will be
00:19:06
i do think though that everybody's
00:19:07
struggling a little bit
00:19:09
so they'll have to consider these things
00:19:10
but it's i primarily see the cost basis
00:19:14
of the full service carriers being the
00:19:16
ones which are most challenging and
00:19:17
they're the ones who are facing
00:19:18
competition from the low-cost airlines
00:19:21
so most of the activity will be there
00:19:22
but yeah i mean they can start
00:19:24
considering options for themselves
00:19:27
amongst the low-cost carriers but there
00:19:29
aren't too many opportunities left there
00:19:31
as you're alluding to
00:19:32
some of them have folded so
00:19:35
i'm not it's hard for me to predict what
00:19:37
will happen on that front
00:19:39
yeah i'm thankful i'm not in the airline
00:19:40
industry
00:19:41
you can make a lot of money in good
00:19:42
times but it is it is really challenging
00:19:44
um and and it's hard to see it getting
00:19:46
less challenging going forward and is
00:19:48
fuel the major impediment right now
00:19:50
would you say are there other issues
00:19:51
that are that would drive consolidation
00:19:54
or some of these closings labor costs
00:19:56
were the other issue but i think after
00:19:57
all everyone went through bankruptcy
00:19:59
protection
00:20:00
they worked on that angle right now fuel
00:20:03
is the uh
00:20:04
has become the largest uh cost for these
00:20:06
airlines yeah
00:20:08
how will this uh this merger
00:20:11
affect consumers do you think
00:20:14
kevin
00:20:15
that's it's hard to say i don't think
00:20:17
most consumers at least in america are
00:20:20
terribly happy with the airline industry
00:20:22
um and so it's hard to see
00:20:25
the consolidation per se making them
00:20:27
happier except to the extent that the
00:20:29
merge company
00:20:31
decides to you know try to invest more
00:20:33
in improving service quality they use
00:20:35
some of those efficiencies that they
00:20:36
would get
00:20:37
from the merger to improve customer
00:20:39
service or to the extent either
00:20:41
they or one of the other major carriers
00:20:44
decides to make that a point of emphasis
00:20:46
um i mean again not not speaking as a as
00:20:49
a
00:20:50
business school professor just as a
00:20:51
person who flies airlines
00:20:53
it certainly seems like a lot of people
00:20:55
would pay another 10 or 20 or even 50
00:20:57
dollars on a transcontinental round-trip
00:21:00
ticket for just the level of food and
00:21:04
service and leg room that they they got
00:21:06
10 or 15 years ago
00:21:07
um and it seems like there should be an
00:21:10
opportunity there but there's a lot of
00:21:11
complexity of course within the industry
00:21:13
that makes it hard to get there yeah i
00:21:16
do think so as well hopefully they will
00:21:18
do some of that otherwise the immediate
00:21:19
fear is of course higher prices if
00:21:21
there's
00:21:22
uh further consolidation in the industry
00:21:25
i mean if we look at it from the point
00:21:26
of view that we want airlines to survive
00:21:30
then for the consumer it's good for them
00:21:31
to merge so that they can at least try
00:21:33
and get some of these efficiencies but
00:21:35
secondarily i think so i think in recent
00:21:37
times and by that i mean the last few
00:21:39
months there has been an effort again to
00:21:42
trying
00:21:43
increase or at least give some thought
00:21:45
to a better service on board and
00:21:48
bring some pillows back and the like you
00:21:50
know so but we all fly uh often from
00:21:53
east coast to west coast uh overnight
00:21:56
and
00:21:56
ordering the day and and would like at
00:21:58
least a hot meal on that plane i
00:22:00
wouldn't mind shelling out another 10 20
00:22:02
or perhaps 30 or 40 bucks for it as
00:22:04
irrational as that may sound but i think
00:22:06
the trouble is what kevin is really
00:22:08
alluding to is that
00:22:10
the airlines have dissected the market
00:22:13
into two groups and i think there's a
00:22:15
third group they're forgetting they've
00:22:16
thought about either the first class
00:22:18
traveler or they've thought about um the
00:22:21
extremely price price conscious traveler
00:22:23
on the other end they haven't thought
00:22:25
about the medium or high-end economy
00:22:27
traveler i'll call them who's willing to
00:22:29
pay a little more they won't just go
00:22:31
with the cheapest option because it's
00:22:32
five dollars or ten dollars cheaper and
00:22:34
i think that's a certainly an area
00:22:36
whether to a premium economy or through
00:22:39
um you know introducing some service
00:22:41
levels again that you would have
00:22:42
previously i think that's an area that i
00:22:44
can only hope like kevin says that some
00:22:46
of these efficiencies will then uh turn
00:22:49
into um positive service improvements so
00:22:52
so given this the the current economy
00:22:55
how would you if you're an airline go
00:22:58
about making a profit
00:23:00
well i i i think well no i think i think
00:23:02
there's an opportunity what we're saying
00:23:03
and of course it depends on what what
00:23:05
size airline you are and what what cost
00:23:07
structure you have i mean the others
00:23:08
southwest for a number of years
00:23:10
profited when all of its competitors
00:23:12
didn't just because they executed better
00:23:13
in lots of ways some of it was
00:23:14
structural some of it was just decisions
00:23:16
they made about hedging fuel prices and
00:23:18
so forth
00:23:19
but i i would agree i think this i think
00:23:21
the opportunity is um if you can't be
00:23:24
the the absolute low-cost company and
00:23:26
that's just really hard to to do and to
00:23:27
pull off consistently
00:23:29
um find a way to get people to have
00:23:31
brand loyalty which which hardly anyone
00:23:33
has in the airline industry and and
00:23:34
again to go back to the the technology
00:23:36
field amazon.com is not the cheapest
00:23:38
place to buy books hasn't been for a
00:23:41
very long time it's cheaper than a
00:23:42
bookstore but there are plenty of online
00:23:44
book sellers that undercut amazon's
00:23:46
price people still go there because they
00:23:48
have a good experience they have loyalty
00:23:49
and amazon has done a lot to cultivate
00:23:52
that i think an airline that executed
00:23:54
that strategy would have a much more
00:23:56
enduring
00:23:57
competitive advantage than one that just
00:23:59
focused on just a little bit better
00:24:01
yield management a little bit better
00:24:02
cost cutting yeah and i think the
00:24:04
tremendous opportunity now is if you
00:24:06
have these consolidated networks
00:24:09
by combining airlines you truly have
00:24:12
global
00:24:13
coverage and with that you know we all
00:24:16
know that the margins are higher in the
00:24:18
international sectors both transatlantic
00:24:20
and trans-pacific
00:24:22
so if one can position oneself as a
00:24:25
good global carrier with many options to
00:24:29
connect to smaller places and then
00:24:31
harmonize the service a little bit so
00:24:32
somebody who comes on a transatlantic
00:24:34
flight and enjoys somewhat of a decent
00:24:36
quality of service doesn't get shocked
00:24:38
when they land at a hub and fly another
00:24:39
four hours to go to san francisco for
00:24:41
instance from the east coast
00:24:43
with a completely different level of
00:24:44
service they could reposition themselves
00:24:45
and they could tap not into you know the
00:24:47
complete leisure traveler who uh travels
00:24:50
once or twice a year but really okay
00:24:52
global business travel and we know that
00:24:54
a lot of it's not just in business class
00:24:56
but it's also an economy class given the
00:24:57
state of the economy nowadays and and
00:25:00
certainly technology companies and
00:25:01
startups make use of that i think that's
00:25:03
the positioning that can now be done
00:25:06
especially as part of these larger
00:25:07
networks and global alliances which the
00:25:09
low-cost carriers don't have so i agree
00:25:12
with that i think fundamentally they
00:25:13
need to
00:25:15
orient their strategy again
00:25:17
or reorient their strategy not just to
00:25:19
try and emulate and copy what the
00:25:22
low-cost carriers are doing but really
00:25:23
to try and find a niche for themselves
00:25:25
and to position themselves accordingly
00:25:27
yeah and one other piece of this again
00:25:28
to get back to government part of the
00:25:30
reason flying is so much worse of an
00:25:31
experience now is this post-9 11
00:25:33
security climate and certainly people
00:25:35
coming in from overseas the you know the
00:25:37
difficulty of getting in
00:25:39
uh arriving in the united states
00:25:41
certainly security is is critically
00:25:42
important and and it's it's obviously
00:25:44
important for the government and for the
00:25:46
the private companies to ensure that
00:25:48
terrorism is prevented and so forth
00:25:50
there's a great deal that that we do
00:25:51
that makes fliers lives worse that
00:25:53
doesn't make security any better and in
00:25:55
some ways makes it worse and again with
00:25:56
an election coming up whichever parties
00:25:59
is not a partisan thing but if if
00:26:00
someone comes into the white house
00:26:02
who makes this you know an issue
00:26:04
to ensure that we appropriately find
00:26:06
ways to be secure while not stepping on
00:26:08
the toes of people flying i think that
00:26:10
will help the carriers as well
00:26:12
very good well thank you very much for
00:26:14
joining us thank you thank you thank you
00:26:18
for more information please visit
00:26:20
knowledge.wharton.upenn.edu
