This time, Microsoft may meet its match
Bill Gates worried that something like Google would come along before it even existed.
In 1995, the Microsoft leader recognized how a powerful Internet player could topple his company from the high-tech pyramid and launched an attack on all potential threats. Netscape, Sun Microsystems and other competitors paid the price.
So did Microsoft. Its tactics triggered a landmark antitrust case that handcuffed the software giant for a decade, hampering its ability to respond when the real Web boogeyman appeared: Google Inc.
But today the shackles are off. Largely unconstrained by the antitrust problems that have dogged it since the late 1990s, Microsoft is the aggressor again.
Its surprise $44.6-billion offer for Yahoo Inc. capped off a year in which Microsoft proved that it was serious about the Internet and willing to throw around its cash hoard.
Yahoo’s board of directors has decided to reject the offer, a person familiar with the matter said Saturday. The person, who is close to Yahoo management, said the company planned to tell Microsoft in a letter Monday that the deal undervalues the Internet company and fails to offset its risk if regulators were to overturn the merger.
Although Yahoo doesn’t want to sell to Microsoft, it has few alternatives. Many analysts expect Microsoft to sweeten its offer, and Yahoo to accept it.
If it wins Yahoo, the Redmond, Wash.-based software giant will have pulled off by far the largest acquisition in its 33-year history to try to keep Google from getting further ahead.
“Microsoft tends to be a reactive company,” said Mark Anderson, an entrepreneur and author of an industry newsletter that counts Gates and Microsoft Chief Executive Steve Ballmer among its subscribers. “They also tend to always be focused on their competition, even down to the individuals that run divisions on both sides.”
Google is lobbying against a potential Yahoo deal, saying Microsoft can’t be trusted. Microsoft counters that it isn’t the dominant player in Web advertising as it is in operating systems and office productivity software.
Pulling for former foe
Fearful of the new giant on the block, some of Microsoft’s old enemies are rooting for it.
For years, Chris Tolles had a front-row seat to the brutal side of the so-called Beast from Redmond. The software developer worked at companies that went head-to-head with Microsoft, including Sun and Netscape.
But now he’s running Topix, a Silicon Valley company that offers local news and other information online. Google launched a competing product last week.
“Creating a valid competitor for Google would be very helpful to the industry,” Tolles said. “That’s the irritating part: I’m rooting for Microsoft.”
Microsoft, which declined to comment, doesn’t enjoy the underdog role.
After its previous attempts to acquire Yahoo or strike a partnership were rebuffed, Microsoft made an unsolicited bid for the company Jan. 31 and announced it the next day. The half-cash, half-stock bid valued the struggling Internet company at $31 a share -- 62% more than its stock’s closing price Jan. 31. But with the slump in Microsoft’s share price since then, the offer’s value has declined to $29.08 a share. Investors expect Microsoft to offer more.
“We keep at things,” Ballmer told employees when the bid was announced. “We don’t start and stop.”
It’s been a long, eventful struggle since Microsoft began its online push.
In a lengthy memo sent to Microsoft executives May 26, 1995, Gates warned that the young World Wide Web could spawn a competitor to threaten the software giant’s computing dominance. He assigned the Internet “the highest level of importance.”
“The Internet is a tidal wave. It changes the rules,” he wrote. “It is an incredible opportunity as well as [an] incredible challenge.”
On Dec. 7 of that year, he unveiled a new Internet strategy. Among several initiatives, Gates announced that the company would give away Internet Explorer with its Windows software, a direct attack on Netscape’s pioneering Web browser.
Gates then noted that it was Pearl Harbor Remembrance Day. The most intelligent comment after Japan’s attacks, he said, was made by a Japanese admiral who said he feared his side had awakened a sleeping giant.
The message was unmistakable: Microsoft no longer was slumbering.
The aggressive and ultimately successful strategy to crush Netscape and other Internet rivals brought major legal troubles. The Justice Department, several states and the European Union filed antitrust claims, contending that Microsoft abused its operating system dominance. Competitors such as Sun also sued.
The court cases forced Microsoft to bank huge amounts of cash for settlements. Microsoft began resolving those cases in 2002 and has spent about $6 billion in cash and consumer software vouchers to end the litigation.
Tangled on Web
Through it all, the company’s Web initiatives struggled. Despite hundreds of millions of Web users, its online business has lost about $2 billion since 2003, said Matt Rosoff, an analyst at research firm Directions on Microsoft.
“Microsoft has yet to show much aptitude for management of online stuff,” said Timothy Bresnahan, chairman of Stanford University’s economics department and a former antitrust official. “All of that effort alienating everyone that works with them to win the browser war . . . and what do they do with the browser? Zip.”
Meanwhile, Google’s profit has skyrocketed thanks to its Web search advertising business. Google conducted 56.3% of all U.S. search queries in December, compared with 17.7% for Yahoo and 13.8% for Microsoft, according to research company Nielsen Online.
Google also is encroaching on Microsoft’s turf, offering free word processing, spreadsheet and other office programs over the Web.
Microsoft has taken the rivalry personally. In 2004, Mark Lucovsky, a senior engineer at Microsoft, told Ballmer he was joining Google. Ballmer threw a chair and began spewing expletives, according to court documents in a lawsuit Microsoft filed over another employee who left for Google.
“I’m going to . . . bury that guy. I have done it before, and I will do it again,” Lucovsky recalled Ballmer saying about Google CEO Eric Schmidt, who had been an executive at Microsoft rivals Sun Microsystems and Novell Inc. “I’m going to . . . kill Google.”
Ballmer later said the description was exaggerated. The suit was settled in 2005.
But in Silicon Valley the reported exchange came to symbolize Microsoft’s growing frustration. As the company began to settle its antitrust lawsuits, it started using its saved money to buy its way back into contention on the Web.
Fighting with cash
Microsoft has done 89 sizable acquisitions since 1994, but most have been for less than $1 billion. It preferred to buy small companies and use their technology to grow instead of bigger companies with large market shares or high sales.
That changed after Google outgunned Microsoft for online ad firm DoubleClick Inc. in April with a $3.1-billion offer.
“That injected a sense of urgency,” said Scott Kessler, an equity analyst for Standard & Poor’s.
A month later, Microsoft made its largest purchase to that point, buying online ad firm AQuantive Inc. for $6 billion. It was a bid no other company could match, Kessler said.
In October, Microsoft outmaneuvered Google for a small piece of the booming social networking company Facebook Inc., paying $240 million for a 1.6% stake. Microsoft reveled in the victory, announcing the deal while Google was holding its annual analyst meeting.
Because Microsoft is playing catch-up in online advertising, regulators have given it more leeway to make big Web acquisitions. Google’s deal with DoubleClick was closely reviewed by U.S. regulators before they approved in December (the European Commission is still considering the deal). Though twice the size, Microsoft’s AQuantive deal sailed through.
Google is preparing to argue in Washington that regulators should consider Microsoft’s prior offenses if Yahoo agrees to a deal.
“We are dealing with a unique competitor here,” said a person familiar with Google’s thinking. “Nobody else has the operating system monopoly. Nobody else has the browser monopoly. Nobody else has been found by the regulators and the courts to have abused those monopolies.”
But times have changed, said Eric Goldman, director of the High Tech Law Institute at Santa Clara University. Google’s dominance in online advertising might help Microsoft executives if they have to defend the Yahoo deal to antitrust regulators.
“They get to make all the arguments that have been made against them for so long,” he said.
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jessica.guynn@latimes.com
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Puzzanghera reported from Washington and Guynn from San Francisco.
