MSFT-YHOO: what does it mean?

The linked article from the NY Times argues that Microsoft’s offer to buy Yahoo signals Microsoft’s failure in growing a profitable, competitive online business organically. This might be true to the extent that Google is unmistakably the biggest dog in the fight, but it’s not the whole story.

A significant problem for companies as large as Microsoft is simply how to engineer sufficient growth to be meaningful. After all, creating a new $1b business from scratch, a fantastic achievement in the business world, would give Microsoft a seemingly paltry 2% growth on $51B of 2007 revenue. Certainly Berkshire Hathaway was not upbraided for noting in its 2006 Annual Report [PDF, 962kb] that large gains “will come only if [they] are able to make large, and sensible, acquisitions.”

The law of large numbers encourages, almost requires, market participants the size of Microsoft (market cap $265B) and Berkshire (market cap $213B) to acquire large companies to meet growth expectations from Wall Street.

Google (market cap $162B) has made a few large acquisitions, but they have not been primarily focused on acquiring revenue or profits; rather, many of Google’s deals have focused on buying the equivalent of billboard space: opportunities for it to present more ads both directly and indirectly.