The Wall Street Journal-20080206-Business World- Deal-s- of the Century
Return to: The_Wall_Street_Journal-20080206
Business World: Deal(s) of the Century
Full Text (871 words)Follow the money, somebody once said, and in Microsoft's case that's not hard. A mighty Mississippi of cash flows into the Redmond software house, and its name is "Office." If you were looking for the reason for the Yahoo bid, this is a good place to begin.
For starters, why on earth would Microsoft want to go up against Google's strength in advertising, which would be the purpose of a Yahoo acquisition? One motive leaps out: Because Google already is extending its philosophy of advertising-supported Web services to take direct aim at Microsoft Office. And when Office crumbles, Microsoft's other cash cow, Windows, can't be far behind.
Yet though Microsoft feels it must compete with Google, it won't throw its key asset into the fight. That's no surprise either. Were it offensively minded, Microsoft would move quickly to put Office on the Web, creating an instant network for delivering ads to millions of captive users. But doing so would violate a law of nature: Companies just don't cannibalize their most profitable, market-dominant businesses, even to jumpstart strategies that might guarantee survival in the long run. A bird in the hand, after all -- and Office is a bird that generates extraordinarily spacious profit margins exceeding 60%.
So, again, why buy Yahoo? Whether or not any synergies materialize, Microsoft would control Yahoo, allowing it to dictate the two companies' joint counterattack on Google's ad business in whatever fashion -- and at whatever cost -- Steve Ballmer and team decide is necessary to impede or deter Google's own drive to the heart of the Microsoft cash machine. Sad? Not really. Notice the alacrity with which Google unleashed its lobbyists to challenge Microsoft-Yahoo on antitrust grounds. Google, no less than Microsoft, is mainly interested these days in entrenching its existing franchise. And both companies have become disturbingly comfortable letting their jousts be mediated by Washington -- a sign of precocious corporatism.
---
A river of money flows out of China for the raw materials of the Chinese miracle. We predicted here in December that a strictly private merger dance between two Anglo-Australian miners would soon flower into a sovereign wealth showdown of historic proportions. Prophecy has now been fulfilled.
In what London and Australian papers delight in dubbing a "dawn raid," bankers working for a Chinalco, a state-owned Chinese aluminum giant, last week orchestrated purchases of shares totaling 9% of Rio Tinto, itself a target of a slow-maturing takeover attempt by BHP Billiton that hits a key deadline in London today. And what of China's choice of partner in this dawn raid? None other than the U.S aluminum maker Alcoa contributed a minority share of the cash, some $1.2 billion, to buy the $14 billion Rio stake.
How the contest plays out may be more telling of the age than the Microsoft-Yahoo melodrama. The Chinese government has made no secret of its displeasure at proposed union of Rio and BHP, which it sees as aimed at exploiting China's insatiable need for iron ore imports. In Davos, former Treasury Secretary Larry Summers last month rehearsed the many fears about sovereign investors -- that they may mix political with commercial motives in ways unhealthy to a market economy. Well, Beijing has now flashed its enormous wallet and bought itself a seat at the table in a battle over a strategic share of the world trade in iron ore, for purposes that China has yet to make clear.
One suspicion is that China may want to coerce Rio Tinto and BHP to cough up assets that China covets -- which would qualify as a dubious use of sovereign wealth per the Summerian criteria. Alcoa has been seeking Beijing's permission to expand on the mainland. It also had its eye on Alcan, a big French-Canadian aluminum operator, but was outbid last year by Rio Tinto. Is Alcoa hoping to ride on Beijing's sovereign coattails and scoop up some of Rio Tinto's assets in a dismantling dictated by China as its price for blessing a Rio-BHP merger?
An alternative theory is that Beijing's goal is simply to block a merger. If so, Rio's share price would surely fall, and the loss to China would be even greater since it paid a substantial premium for its stake last week. Deliberately losing money in order to play spoiler in a private transaction would also seem a questionable use of sovereign financial clout.
Whatever China's concerns on ore pricing, BHP has made a strong case for a merger to speed development of Australia's mineral resources and make better use of its overstretched rail and port networks. China may disagree, but the best way to clear the air would be simply to make its own legitimate, honestly priced bid for all of Rio Tinto. Such a deal would be fair to shareholders of both companies. No one could argue that China was using its financial clout merely to interfere in the private market's normal, healthy search for efficiency and profit.
A Chinese bid for Rio would, of course, be politically explosive in Australia and far beyond. For precisely that reason, such a bid would also help to establish an interesting and useful precedent for a world coming to terms with aggressive sovereign wealth.
