The Wall Street Journal-20080206-BUSINESS- Ballmer Should Adopt Oracle-s Mantra

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BUSINESS: Ballmer Should Adopt Oracle's Mantra

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MICROSOFT Chief Executive Steve Ballmer has offered a medley of reasons for trying to buy Yahoo -- without finding one that pleases his investors. Since Microsoft launched its $44.6 billion bid on Friday, its shares have tumbled 11%.

Maybe Mr. Ballmer should hire a new speechwriter: Larry Ellison, the acquisition-minded CEO of Oracle.

In the past few years, Oracle has been expanding its business- software lineup by snapping up companies such as PeopleSoft, Siebel Systems and BEA Associates. Some of those deals have been fractious, even outright hostile. But Oracle's stock has climbed about 67% in the past five years, outpacing Microsoft, which rose 24% in price over the same period, or about 40% if adjusted for a big special dividend.

Mr. Ellison has explained his deals in language a third-grader could understand. At an investors' conference in 2006, he declared: "We want to be No. 1 in all the segments. This isn't vanity. The No. 1 software company in every segment makes all the money . . . . We never buy anything where it doesn't put us in the No. 1 position or get us in such a strong No. 2 position that we think we can get to No. 1 very quickly."

Hard-charging bank bosses talk like that. So do the CEOs who run hotel chains, aluminum mills and breweries. Indeed, acquisitions in pursuit of dominant market shares are widely accepted in aging, slow- growth industries. Operating turmoil can be intense. But the chances for cost cutting, margin improvement and increased market power are immense.

IS SOFTWARE all that different? Conventional wisdom is that technology, in general, and software, in particular, are all about talent. Brilliant engineers and their sales teams can't be shoved around with impunity. If cultural and integration issues aren't handled with care, the thinking goes, a software company's growth prospects can be destroyed in hurry.

A well-known champion of the gentle approach is International Business Machines, which has made 52 software acquisitions since 2000. Those deals have all been friendly, says Kristof Kloeckner, head of IBM's software strategy. IBM has kept more than 90% of target companies' key executives, he adds, while helping these businesses speed up their growth.

But the success of Oracle's hardball tactics can't be ignored. After buying PeopleSoft in 2005, it shed 5,000 employees and steered customers toward alternative Oracle products. That made for bumpy times within PeopleSoft. But the extra market clout from picking up those customers was enough to justify Oracle's approach.

Of course, even if Microsoft succeeds in buying Yahoo, the combined company won't vault to the No. 1 position in Internet search or associated advertising. Industry leader Google controls 55% or more of those markets, depending on how they are defined. Microsoft plus Yahoo would hold about 30%.

Still, Microsoft would be a lot better off than it is today, as the No. 3 player in search. It is struggling to make money in this area while Google is earning billions of dollars a year.

After a series of antitrust battles, Microsoft has a hard time talking bluntly about market share. So Mr. Ballmer has been promoting the Yahoo bid as a way to improve consumers' Internet experience. But combining the two companies' engineering efforts is more likely to create short-term headaches, rather than a sudden burst of innovation.

Harvard Business School Prof. David Yoffie sees a parallel to the mid-1990s, when Microsoft was briefly the underdog in the Internet "browser wars." Netscape appeared dominant. At that time, Microsoft founder Bill Gates got a memo from one of his lieutenants titled: "How to Get to 30% Share in 12 Months."

THE THINKING was that 30% would be enough to sustain a tough, two- company fight, in which Microsoft could eventually prevail. As it happened, Microsoft raced to market dominance. It did so without acquisitions, by bundling its Internet Explorer browser with other widely used products to make it the de facto standard.

Prof. Yoffie has doubts whether Microsoft's new quest for 30% -- its bid for Yahoo -- will pay off. It's likely to take many months before the bid can be completed. Meanwhile, rivals like Google will be well- placed to poach Yahoo talent.

Microsoft's Mr. Ballmer has estimated that the combined companies could save $1 billion in operating costs. Data centers, engineering teams and sales forces could be consolidated. "One can certainly speculate that we don't need two of everything," he told journalists over the weekend.

Cost cutting has its place, but many tech-strategy experts say the market-share argument is the one they are watching most closely.

Holding strong in search and online advertising isn't just about a big market in its own right, says Rebecca Henderson, a professor at the Massachusetts Institute of Technology's Sloan School of Management. Leadership in search and advertising may also sway consumers' loyalties for a wide range of other computing services, she says.

A Microsoft unable to prevail in search could find its dominant positions in desktop computing more vulnerable to challenges from competitors like Google.

As Oracle's Mr. Ellison explained in 2006: "It's No. 1 or it's over."