Marc Andreessen’s analysis of the Microsoft – Yahoo drama

We all know Marc, a serial entrepreneur and founder of Netscape, right? Well, if you happen to follow his weblog, you’ll see that he also offers some very good analysis of ‘the events of the day’. Take, for example, his excellent post on the possibility of Microsoft going hostile on Yahoo. Here’s an excerpt:

We are learning that hostile takeovers have arrived in our industry. This is the second major hostile takeover so far — the other was Oracle’s takeover of Peoplesoft — but there will be more.

This is significant because historically hostile takeovers practically never happened in technology. Potential hostile acquirors assumed that hostile takeovers wouldn’t work because the target company’s employees would bail and the target company’s business would collapse.

It turns out that as technology companies become larger and more mature, acquirors are becoming increasingly convinced that neither of these assumptions hold. Perhaps employees of large tech companies aren’t that bonded to current management, and perhaps many of them would actually prefer to work for a larger, more dominant combined company. And maybe as a consequence, the target’s business would do just fine in the wake of a hostile takeover — in fact, maybe it would do better, due to advantages of combined size and scale.

Anyone who has been in this industry for the last five or six years knows that the early, go-go days, are well behind it. Andreessen mentions the Oracle takeover of Peoplesoft as the first hostile act, and that may be true. What we should also remember is that, by going hostile on Peoplesoft, Larry Ellison fired a shot across the bow of every major enterprise software company. Soon after the Peoplesoft acquisition, Ellison went on a tear, acquiring over 40 major enterprise software companies including my old employer, Siebel Systems. Just a few years before, this type of consolidation was not imaginable within the industry because the enterprise software vendors were living under two equally delusional assumptions, the first that double digit growth would not go away for a long time, and second – as Andreessen points out – hostile acquisitions would lead to a mass exodus of talent from the acquired companies. Unlike consolidation in other industries, a software company’s real asset is their human capital. The risk of losing this human capital, it was assumed, served as a natural ‘poison pill’ to hostile acquisition. But, as consolidation becomes a norm, not an exception, people have fewer and fewer places to flee to, undermining the bulwark of human capital flight.

At least through a Microsoft acquisition, Yahoo employees – those that survive the inevitable cuts – will have a management team that has some understanding of their business. Oracle has proven that such acquisitions can drive growth, now it might finally be time for Microsoft to do the same.