Microsoft-Yahoo: lessons from Oracle-BEA

Given the timing of events, it’s hard not to compare the current Microsoft-Yahoo takeover battle with the recently concluded conquest of BEA by Oracle. Some of the parallels are quite obvious with large, stalwart, traditional software organizations making bids on younger, (some would say) cooler targets in areas tangential to the core of the would-be acquirer. But rather than focus on the relative business domains of the participants, it’s much more interesting to dissect how the Oracle-BEA drama has impacted the strategies for both Microsoft and Yahoo.

Oracle originally offered BEA a 21% premium. In retrospect, this offer was a mistake that allowed the deal to linger far longer than was necessary. Ernst & Young has determined that the long-term takeover premium is approximately 24%. Given BEA’s position as the #2 vendor of enterprise middleware software, Oracle should not have expected to get a below-average price for such a target. By contrast, Microsoft’s initial offer to Yahoo provided for a 63% premium. Microsoft did not entertain the idea of getting Yahoo on the cheap. Microsoft realized that Yahoo is prime real estate and made a compelling offer.

Given the offer price, BEA had the luxury of time to negotiate with Oracle. BEA only had one very vocal investor, Carl Icahn, applying pressure on the BEA board to accept and offer or sell the company off in pieces. However, with a 63% premium dangling in front of them, a good many more of Yahoo’s shareholders are applying pressure on the company to act in one way or another to increase their investment.

On the flip side, Yahoo has a good many supporters, particularly within their user community, who have implored the company to avoid “going over to the dark side.” This groundswell of support, which did not exist to nearly the same degree for BEA, has given Yahoo the ability to push back and actively seek out a white knight strategy, seeking partnerships with either NewsCorp or Google as a way to bolster the company’s flagging stock and remain independent. This has forced Microsoft to take the fight directly to the shareholders, which is a much more cumbersome process.

In addition, Yahoo has taken the bold step of acting like a strong company instead of the weakling that BEA portrayed. Yahoo continued to acquire companies themselves, and to restrategize their core business. These moves can only work to improve Yahoo’s position.

Much of the Microsoft-Yahoo drama is yet to unfold, and there will undoubtedly be at least one significant plot twist ahead. Will Microsoft be able to dangle a big enough worm in front of Yahoo shareholders to set the hook? Will Yahoo find shelter in a nearby reef? Will a bigger fish come by and steal the prize first?

My gut tells me that eventually Microsoft will get what they covet. The only real unknown is how much it will cost.

Record profits: it does not bode well for the Oil industry

Should an industry continue to receive government subsidies and tax breaks when its members are posting record profits? Apparently it should, when it’s the oil industry.

Not only did both Exxon and Chevron, on February 1, post record profits for the quarter, but Exxon posted the highest-ever quarterly and yearly profits for a US company. Let’s take a second to appreciate the magnitude of this last statement. Exxon is the most profitable company that the US has ever seen!

But, such historic success is hardly attributable to internal prowess on the part of the industry players and much more due to the structure of the industry itself and external factors. The overlaying, reinforcing components are many but boil down to artificially high oil prices and the structure of the industry.

Oil prices are at historically high levels, with a barrel of oil averaging about $90 over the last quarter with a high over $100 per barrel. This was due in large part to the law of supply and demand. With the increased demands of developing nations and the growth of the economies of India and China, demand has risen steadily over the past decade. However, supply has not kept pace. In fact supply has been kept artificially low by OPEC, which operates as an international cartel, outside of the constraints of US anti-collusion laws. (A similar situation exists in the diamond industry, where DeBeers uses what might be considered strong-arm, anti-competitive tactics to keep the price of diamonds artificially high.)

The structure of the oil industry in the US is that of an oligopoly comprised of only a small number of participants. But, as opposed to the airline industry, where the industry structure leads to fierce price wars, triggered by attempts by one firm to gain marginal market share from the others, which ultimately keep consumer prices low, the oil industry does not succumb to the same pressures.

But why not? First, because the cost of raw materials (the oil) is set artificially high and is made uniform by the international cartel. So industry participants can do little, if anything, to differentiate themselves based on this primary resource. This, in turn, provides a disincentive for oil companies to innovate. They continue to turn the same crank the same way they always have and the rising tide of increased demand raises all boats.

Second, the industry avoids price wars because it is so vertically integrated that there is no place in the value chain that the oil companies don’t control, which might allow a new entrant to gain an advantage or even compete on the current field. The incumbent oil companies control it all: the exploration for new oil fields, the pumping of oil, the refining, the delivery to fueling station, and the final sale to the end customers (be they automobile driver, airline, or electricity generation plan).

Gas station owners have even protested the amount of control that the large oil companies exert over their “independently owned” affiliate stations.

This level of vertical integration harkens back to the great monopoly of Standard Oil or reminds us of the old company towns associated with the mining and lumber industries of years past.

Even at the pinnacle of business, with all-time record profits, industry analysts are claiming that the oil industry is in huge trouble because they can’t grow production. But, rather than address the issue head on, and encourage an evolution of the industry, government seems content to give big oil a bonus for doing business the same old way, in the form of heightened subsidies for oil exploration and production.

Unfortunately, this strategy of clinging desperately to the current business and fighting against innovation has been proven time and again to eventually fail. Companies in all industries throughout history have learned the lesson that they either need to evolve or perish. Railroad companies were stuck in their railroad business mindset and failed to see they were part of the larger transportation industry. Eventually they were relegated to second-class status with the rise of trucking.

So too must oil companies reinvent themselves as part of the larger energy industry or else suffer the fate that certainly awaits them: irrelevance.

The Machine Stops: the prophesy of 1909

In case you missed it, an Internet failure has “crippled” most of the Middle East and North Africa. Two undersea data cables have been accidentally cut, causing “severe problems” from Egypt to India. While nobody is yet speculating officially, the economic ramifications could total into the trillions of dollars.

Will this lead to mass hysteria? The end of the world (or at least the Metaverse) as we know it? Armageddon? Maybe not, because this has been a relatively isolated event. But, what if there were a more systemic problem? What havoc would that cause? Some insights can be gleaned from a 100-year-old prophesy, embodied in the short story “The Machine Stops” by E.M. Forster.

But there came a day when, without the slightest warning, without any previous hint of feebleness, the entire communication-system broke down, all over the world, and the world, as they understood it, ended.

Sound familiar? The warning bell has tolled this week.

While we could delve into the apocalypse that an Internet failure would bring about in our modern world, the lessons of “The Machine Stops” are much more profound than that and are so very germane to our lives today that the story is almost eerie.

How we have advanced, thanks to the Machine!

Members of Generation Y can scarcely remember a time without the Internet. The most respected and widely covered industries owe themselves entirely to it. The Internet has been the central and key resource upon which our communication, our education, our economy, our everyday lives have been molded for the past 10-15 years. But, have we become too dependent on the Internet?

But Humanity, in its desire for comfort, had over-reached itself. It had exploited the riches of nature too far. Quietly and complacently, it was sinking in decadence, and progress had come to mean the progress of the Machine.

We collectively spend entirely too much time and effort on how the Internet will evolve, what the Internet will become, what more the Internet can do for us. (I do not exclude myself from this statement, as evidenced by my other postings.) We have fallen victim to the Information Age. With the flood of information, we’ve mostly stopped thinking for ourselves, and reverted to simply reading and recounting the interpretations of others.

And even the lecturers acquiesced when they found that a lecture on the sea was none the less stimulating when compiled out of other lectures that had already been delivered on the same subject. “Beware of first- hand ideas!” exclaimed one of the most advanced of them. “First-hand ideas do not really exist. They are but the physical impressions produced by live and fear, and on this gross foundation who could erect a philosophy? Let your ideas be second-hand, and if possible tenth-hand, for then they will be far removed from that disturbing element – direct observation. Do not learn anything about this subject of mine – the French Revolution. Learn instead what I think that Enicharmon thought Urizen thought Gutch thought Ho-Yung thought Chi-Bo-Sing thought Lafcadio Hearn thought Carlyle thought Mirabeau said about the French Revolution. Through the medium of these ten great minds, the blood that was shed at Paris and the windows that were broken at Versailles will be clarified to an idea which you may employ most profitably in your daily lives. But be sure that the intermediates are many and varied, for in history one authority exists to counteract another. Urizen must counteract the scepticism of Ho-Yung and Enicharmon, I must myself counteract the impetuosity of Gutch. You who listen to me are in a better position to judge about the French Revolution than I am. Your descendants will be even in a better position than you, for they will learn what you think I think, and yet another intermediate will be added to the chain. And in time” – his voice rose – “there will come a generation that had got beyond facts, beyond impressions, a generation absolutely colourless, a generation seraphically free from taint of personality, which will see the French Revolution not as it happened, nor as they would like it to have happened, but as it would have happened, had it taken place in the days of the Machine.”

The course that we are following now is one of ever-increasing dependence on all things Internet strips us of our very humanity. Of course, we could all remember that there once was life without the Internet. People survived, and even managed to thrive before this invention managed to pervade our very souls. We can learn again to ignore the constant flood of emails, to turn off the computer, to leave the cell phone at home. We could even discover the rewards of spending more time on our first life and less time on Second Life.

Cannot you see, cannot all you lecturers see, that it is we that are dying, and that down here the only thing that really lives is the Machine? We created the Machine, to do our will, but we cannot make it do our will now. It was robbed us of the sense of space and of the sense of touch, it has blurred every human relation and narrowed down love to a carnal act, it has paralysed our bodies and our wills, and now it compels us to worship it. The Machine develops – but not on our lines. The Machine proceeds – but not to our goal. We only exist as the blood corpuscles that course through its arteries, and if it could work without us, it would let us die. Oh, I have no remedy – or, at least, only one – to tell men again and again that I have seen the hills of Wessex as Ælfrid saw them when he overthrew the Danes.