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Originally published Monday, February 11, 2008 at 12:00 AM

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Brier Dudley

Yahoo merger deal is Ballmer's baby

Microsoft's long-awaited move to buy Yahoo is causing all sorts of emotional distress in Silicon Valley, but perhaps the psychoanalysis...

Seattle Times staff columnist

Microsoft's long-awaited move to buy Yahoo is causing all sorts of emotional distress in Silicon Valley, but perhaps the psychoanalysis should be happening in Redmond.

Specifically, in the upper corner of Microsoft's headquarters Building 34.

Despite those stories fed to East Coast newspapers about Microsoft lieutenants cooking up Internet strategy over kitchen tables, the Yahoo merger is Steve Ballmer's deal.

Whenever a Microsoft division struggles — the way online services have struggled recently — Ballmer steps in to right the ship. But this time the stakes are higher.

The Yahoo deal, which takes a turn today with an expected rejection of Microsoft's bid,will be the hallmark of Ballmer's leadership of Microsoft, post-Bill Gates. Even though it's just part of Microsoft's broad effort to build a Googlesque advertising and online services business, it will come to symbolize the extreme measures Ballmer's taking to ensure Microsoft's relevance in the post-PC computing era.

Ballmer's not only betting the company on the Yahoo deal, he's betting his legacy.

Ballmer would probably say I'm full of it. Microsoft executives always downplay the role of individuals, crediting the team and the organization.

It's also true that while Gates is moving to philanthropy full time this summer, he's not leaving Microsoft completely. He'll remain chairman, spiritual leader and Ballmer confidante.

But after 28 years of working for and alongside his college pal, Ballmer has to be thinking about his opportunity to fully lead the creation of a huge new core business.

The Yahoo deal also makes it clearer than ever that Gates is no longer calling the shots.

Not that Gates didn't make big bets. Under his watch a decade ago, Microsoft invested more than $10 billion in telecom companies to be sure it was a player in the Internet game.

But Gates never bet so many chips at once. He was too cautious about making payroll. Here's how he put it in a speech he and Warren Buffett gave at the University of Washington in 1998, as recorded by Fortune:

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"The thing that was scary to me was when I started hiring my friends and they expected to be paid. And then we had customers that went bankrupt — customers that I counted on to come through," Gates said.

"And so I soon came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year's worth of payroll, even if we didn't get any payments coming in. I've been almost true to that the whole time."

To buy Yahoo, Ballmer's spending the equivalent of twice Microsoft's cash pile.

The deal will also give Microsoft something unprecedented: debt. But math whiz Ballmer is comfortable with complicated financing deals. This one's nothing compared to the exotic stock-option buyback program he and J.P. Morgan engineered in 2003.

A better template for the Yahoo deal, though, may be the push Microsoft made to buy its way into the mid-size business software in 2001 and 2002, just after Ballmer became chief executive.

In a two-step deal similar to the aQuantive and Yahoo purchases, Microsoft spent $2.5 billion buying Great Plains Software of Fargo, N.D., and Denmark's Navision.

It took longer than expected to get those companies' software on a common base, and the midsize business unit never took off as a stand-alone division at Microsoft. Now it's blended into other groups, so its hard to say exactly how or if the deals paid off.

But the new talent and customers eventually helped Microsoft bulk up its formidable enterprise-software business. And the folks in North Dakota and Denmark made peace with their new boss.

Brier Dudley's column appears Mondays. Reach him at 206-515-5687 or bdudley@seattletimes.com.

Copyright © 2008 The Seattle Times Company

About Brier Dudley
Brier Dudley offers a critical look at technology and business issues affecting the Northwest.
bdudley@seattletimes.com | 206-515-5687

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