What a clever game Steve Ballmer is playing with Yahoo! Walking away from his bid for Yahoo was the best move he could have made. In the process, Ballmer is revealing himself a student of Sun Tzu's Bing Fa. My personal prediction is Microsoft will win in its bid, and probably for not much more than the bid he just ended. The reason is simple: Yahoo needs Microsoft more than Microsoft needs Yahoo.

Google is the dominant player in the online search game. Maybe not in every country. Yahoo is still very strong in China, while Google is not. But clearly Yahoo has a fight on its hands for dominance of online advertising. Note how Yahoo sought a white knight in the face of Microsoft's bid. Ironically, Yahoo approached its main competitor Google. Google, which was already warning it was going to fight a Microsoft-Yahoo tie-up on the grounds it would be uncompetitive, offered to share its search technology with Yahoo.

End result:

• Google became stronger by showing its dominance in the search game. It can't make a move on Yahoo because that will never get past the competition authorities. But by sharing its search technology it already smacks of a merger by stealth.
• Yahoo revealed its weakness by scampering for a saviour. Now that Microsoft launched a bid, the company is in play. Everytime the stockprice falls, people will say Microsoft will make another bid for it. It won't end until its taken over.
• Microsoft certainly didn't want to see a Yahoo-Google tie-up, and it was a good enough pretext for Ballmer to walk away from it. But come on, is he really now no longer interested in Yahoo? Microsoft is still the one with multi-billion dollar cashflows. Having shown his hand, Ballmer is committed to winning the game, or forever be reflecting on 'the one that got away'.

But don't forget shareholders. At the end of the day, it's their call. And right now, I would rather be Steve Ballmer than Jerry Yang. Yang has to explain to Yahoo shareholders why he said no to Microsoft's offer, which valued the company at substantially more than the market did.

My call: Microsoft will wait for a while to see what happens next. Yahoo's stockprice will fall further. Yahoo only has two choices: play ball with the arch-competitor Google, or Microsoft. Ballmer will then make another bid. Shareholders, who are unhappy with Yang for not saying yes to the now-defunct first bid, will be glad to accept.

Google may argue against a merger on competitiveness grounds. It knows Microsoft is still on the nose in many countries over its dominance in software. It will want to play on the fears that Microsoft will do to online search what it did to operating systems and office software. But then again, Google is already the Microsoft of the online search game. Regulators may take the other view and think that a little competition to Google will do advertisers more good than harm. Any advertiser, who has seen search terms become more and more expensive on a per-click basis, will testify to that.

But Microsoft will win it. Ballmer reminds me of Rupert Murdoch. Back in 2000, the News Corp chief wanted to get control of the US satellite television network Direct-TV. That was then owned by Hughes Electronics, owned by General Motors. News Corp lost a hostile takeover battle to Echostar. But Echostar's deal didn't go through. In stepped Rupert Murdoch again. He had the last laugh afterall.

The same will happen for Microsoft.

It's funny how these things turn out.


Mark Laudi, who predicts another Microsoft bid will come before the end of 2008.

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Labels: Jerry Yang, Microsoft, Steve Ballmer, Yahoo