The Wall Street Journal-20080204-Unified Ad System Is Key to Making A Merger Successful

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Unified Ad System Is Key to Making A Merger Successful

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In personal computers, Microsoft Corp. achieved dominance by selling the Windows operating system that controls most PCs. The company's bid for Yahoo Inc., in large part, is an attempt to replicate that same kind of broad influence over the Web by supplying the underlying software for placing ads online.

While the deal could be upset by any number of factors including regulators or a rival bid, Microsoft's game plan for making a merger work would likely focus first on the computer systems and services that advertisers use to place ads on Yahoo and Microsoft Web sites. The key would be to connect all or parts of the two companies' ad- delivery systems as quickly as possible, to compete better with a comprehensive set of technologies that rival Google Inc. is also assembling.

Lower on the priority list would be integrating such high-profile services as Yahoo's email with Microsoft's Hotmail offering, said people familiar with Microsoft's thinking. Those services would likely continue separately under their existing brands, at least for some time, these people said.

In an interview yesterday, Microsoft Chief Executive Steve Ballmer said planning how to blend the two company's ad systems would be a key focus. "Details need to be worked collaboratively once we've reached a deal, but one can certainly speculate that we don't need two of everything," he said.

How Microsoft blends the two companies would have broad ramifications for millions of Web users, as well as employees. Such integration efforts are rife with pitfalls, including potential defections of technology talent and distractions for senior management.

Microsoft studied Hewlett-Packard Co.'s 2002 acquisition of Compaq Computer Corp. in preparing its Yahoo bid, said a person familiar with the matter. In that $19 billion merger -- affecting more than 150,000 employees -- H-P and Compaq set up a committee of executives from each company before the deal closed that then chose a broader team from multiple levels of management at the companies.

Those managers were named to important management positions and were offered bonuses to stay at the company, according to a case study co- authored by Harry "Webb" McKinney, one of the executives in charge of the integration of H-P and Compaq. That group was called a "clean team" since managers focused exclusively on the integration and not on their day-to-day work.

One reason is the need for speed. Allowing a company to get bogged down in integration planning raises the odds of losing valuable people, said Jeff Clarke, a former Compaq executive who worked with Mr. McKinney on the merger. That could be particularly damaging for companies like Microsoft and Yahoo, whose greatest assets are the engineers and developers who create their software and services.

Microsoft expects to set up a similar clean team with Yahoo executives, said a person familiar with Microsoft's planning. Much of that group's initial focus would likely be on what Internet companies call an ad platform, which is the collection of computers and Internet services for buying, selling and placing Web advertisements.

In addition to ads associated with their own search engines, Google, Yahoo and Microsoft work with advertisers to place ads on other companies' sites. Google has one dominant service in the field -- used for search ads -- which it is now expanding to other forms of advertising, such as video and display ads online, and ads in newspapers, television and radio. Microsoft and Yahoo also have ad platforms that they are working hard to expand.

On the Microsoft side, the company had begun beefing up advertising capabilities last year with the $6 billion acquisition of aQuantive Inc., a holding company for several online advertising businesses that include the online ad agency Avenue A/Razorfish. That deal also brought Microsoft a system called Atlas that delivers online ads to Web sites and manages them.

Yahoo, meanwhile, internally designed a similar system to handle search ads called Panama and is in the process of building a new omnibus ad system to also include display advertising. Yahoo has said it hopes to start rolling out that system -- which people familiar with the matter said has been codenamed "Apex," short Advertiser Publisher Exchange -- in the second half of the year.

Google also has widely used systems for selling ads that appear on its own site and those operated by partners. Its planned purchase of DoubleClick Inc., which is still being reviewed by European antitrust regulators, is intended to broaden its systems for selling and serving up graphical display advertising, such as banner ads.

One challenge for integrating Microsoft and Yahoo's operations is technical. Yahoo has tended to develop ad systems and Web sites around non-Microsoft software, including the Unix operating system. Microsoft uses versions of Windows. Prior to the takeover bid, Microsoft executives had long criticized Yahoo's ad system as inferior to theirs, which suggest the company might lean more on Microsoft's own technology in an integration effort.

In the interview, Mr. Ballmer noted that an ad platform is possibly even more strategic than an operating system such as Windows, because it is a system that conveys information about ad pricing and is actually used to collect money for ads.

"So the very strong market position that the market leader has is even more interesting, I think, for all industry participants," Mr. Ballmer said.

Mr. Ballmer predicted that such advertising engines will evolve in other ways that the greater scale of a combination with Yahoo can help. He said that he expected online ads will be sold through automated Internet auctions.

"Auctions are more efficient when you have large numbers of buyers and large numbers of sellers in the pool," Mr. Ballmer said. In that and other areas for advertisers and Web properties, "bringing Yahoo and Microsoft together can bring great value."

Beyond the advertising integration, Microsoft and Yahoo executives eventually would need wring costs out of the merger. In a letter to Yahoo's board last Thursday, Mr. Ballmer said he calculated at least $1 billion in cost savings that could result from the merger.

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Kevin J. Delaney contributed to this article.