The Wall Street Journal-20080202-Microsoft-s Bid for Yahoo- A Defining Test for Ballmer- Bid for Yahoo Presents His Biggest Challenge In Remaking Microsoft
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Microsoft's Bid for Yahoo: A Defining Test for Ballmer; Bid for Yahoo Presents His Biggest Challenge In Remaking Microsoft
Full Text (995 words)Over his 28 years at Microsoft Corp., Chief Executive Steve Ballmer built his image as a bulldog of a businessman who bested aggressive rivals and grappled publicly with governments while helping spread personal computers to millions of people around the world.
Yet his reputation as a leader will probably be defined most by his offer Friday to buy Yahoo Inc. In effect, the bid is an acknowledgment of the company's inability under Mr. Ballmer to manage many of today's challenges brought on by the Web.
In offering $44.6 billion for Yahoo, Mr. Ballmer is taking Microsoft into uncharted waters. A large unsolicited bid is the kind of move that has been completely against the culture of the company, which has tended to rely on its own product development to break into markets. And it would be the biggest deal financially in Microsoft's history and come with complexity impossible to comprehend fully: Mr. Ballmer will need to pull Yahoo's 14,300 employees into Microsoft's ranks of 80,000 people.
That challenge will test all of Microsoft's top managers but none more than Mr. Ballmer. He has led Microsoft's charge into online advertising that is at the heart of the Yahoo bid. It is a business that holds great promise as the online market expands but one that is far removed from Microsoft's traditional software expertise. So far, Mr. Ballmer's strategy hasn't worked.
The deal comes as Mr. Ballmer is likely to announce an executive shake-up, the latest in a series of high-level staff changes that demonstrate the 51-year-old former salesman's frustrations. The changes likely will mean the departure of several vice presidents, according to people familiar with the company. The online-services group, which is behind the Yahoo bid, is being prepared for a shake-up that would expand the responsibilities of Brian McAndrews, a Microsoft senior vice president who arrived at the company last year with its $6 billion acquisition of online-advertising company aQuantive Inc.
In an interview, Mr. Ballmer characterized the offer as just one of the many challenges he has taken on in his career. He also said it is one of several strategies Microsoft is taking to expand over the next 10 years. Within that context, the Yahoo bid "is certainly a major play against one of those things," he said.
At the heart of Mr. Ballmer's challenge is Microsoft's foray into such consumer markets as videogames and theonline services at the center of the Yahoo bid. Expansion into those areas was driven by Microsoft co-founder Bill Gates, who saw the spread of Microsoft software into new areas as critical for the company's growth. Mr. Ballmer, meanwhile, was less enthused about that consumer expansion, seeing it as a diversion from Microsoft's core business of making and selling software for businesses, said people familiar with his thinking at the time. Yet Mr. Ballmer inherited strategies -- business and consumer -- when he took over day-to-day operations in 2000 from Mr. Gates, who is chairman and is set to retire from full-time work at Microsoft in June. Under Mr. Ballmer's direction, the business-market end has thrived. Despite a tough climate of business technology spending, Microsoft has expanded sales of Windows, Office and new products to companies large and small. One example: Microsoft's server and tools group has posted more than 20 consecutive quarters of double-digit-percentage growth.
On the consumer side, Microsoft is struggling. Mobile phones, music players and online services have sucked up tens of billions of Microsoft's profits in the past 10 years. It has failed to make a significant dent in the market share of leaders. The company's Xbox videogame business has a strong place in the market and will probably make its first profit this fiscal year. Still, the business has lost untold billions of dollars since Microsoft sold the first Xbox in 2001.
Nowhere is the consumer challenge more stark than in online services, where Microsoft has bled money as Google has churned out profits. Those losses come as Mr. Ballmer followed a proven Microsoft approach to new markets through what executives call "ground wars": Microsoft's engineers would build new technologies from scratch and improve them until the company bested a market leader.
That Microsoft would make such a big bid in such an important business is another sign its old ways are no longer working -- and that Mr. Ballmer is willing to adjust his thinking to try to remake Microsoft's culture.
But the bid also is an extension of a shift in management style by Mr. Ballmer over recent years: As the company faced maturity and slower growth, Mr. Ballmer has begun hiring outsiders to bring in new ideas. He has pulled in a chief operations officer and a finance head and, recently, new chiefs for the Office division and the videogame unit.
If the deal goes through, Mr. Ballmer likely will rely on one of the new outside hires, Mr. McAndrews, who is the most likely candidate to oversee the combined group, said people familiar with the company's plans. Microsoft said unifying with Yahoo would yield at least $1 billion in annual savings through eliminating overlapping efforts in areas such as developing the technical infrastructure behind online advertising and services.
The success or failure of the deal will largely be on the shoulders of Mr. Ballmer's lieutenants. Chief Finance Officer Chris Liddell, a former paper-industry executive, has brought Microsoft a more aggressive stance on acquisitions and its use of cash. Kevin Johnson, head of Microsoft's platform and services division, is under pressure to maintain the company's core Windows PC software while expanding the online-services group.
Microsoft executives are discussing a reorganization of Mr. Johnson's group that likely would consolidate marketing under Vice President Bill Veghte and online services under Vice President Satya Nadella, said people familiar with the situation. As part of those changes, several vice presidents are expected to either leave the company or be given new responsibilities, these people said. A Microsoft spokesman declined to comment on the changes.
