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The Microhoo! deal is all about network effects

Posted in Analysis, Business, Economics, Google, Microsoft, Yahoo on February 4th, 2008 by leodirac – Comments Off on The Microhoo! deal is all about network effects

Although most corporate mergers fail (often due to mis-aligned incentives on the part of the deal-makers) there is a solid economic foundation for the proposed Microsoft + Yahoo! merger. Most of their assets will work no better combined than separate. But the merged Microhoo ad network would be significantly more valuable than the sum of two ad networks alone. Why bigger is better for online advertisers The reason lies in network effects of the online search + advertising industry. Imagine you’re an ad buyer which is to say you have a service you want consumers to find online. Unless you’re…

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Microsoft buys tiny stake in Facebook: Game on!

Posted in Analysis, Business, Facebook, Google, Microsoft, Yahoo on October 25th, 2007 by leodirac – 7 Comments

After months of rumors about companies trying to buy Facebook, yesterday a deal was announced. In a sense the deal is quite small because Facebook sold just a 1.6% equity stake to Microsoft. But by paying $240 million, the deal values Facebook at about $15 billion! What’s going on here? This surely can’t be based on rational economics, can it? Let’s analyze how these deals should be valued and take a few steps back through recent internet acquisition history for context. In trying to keep this post focused, I wrote a separate article about why mergers and acquisitions rarely work….

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