Speculation: A Yahoo!-eBay Merger Makes Sense

The idea of a Yahoo!-eBay merger has been around for a long time. Most recently, the merger rumors were revived by Tim Poulus over at Seeking Alpha last June. Before that it was Jim Cramer on CNBC back in May. It’s been about a month since the last round of speculation, so maybe it’s time to revive it. I don’t have any inside information, but of all the Yahoo! merger/acquisition talk (Microsoft, New Corp./MySpace swap, etc.), I think eBay makes the most sense.

This would not be an acquisition, but neither would it really be a merger of equals. eBay has the bigger market cap (~$44B to ~$31B) — the gap between the two has grown over the past month — and the more recognizable brand (2007 Interbrand rankings PDF). The fact that eBay would control so much more of the new company might be unattractive for Yahoo! shareholders, but the merger would still be beneficial to both companies, in my view.

eBay and Yahoo! have little overlap in their core businesses, but I think they compliment each other well. eBay is primarly an ecommerce business, while Yahoo! is an advertising business; a combined company would have a very diversified revenue stream. The two companies already have a strong working relationship, which Yahoo! President Susan Decker praised in her Q2 earnings remarks a couple of weeks ago:

“In our two most significant publisher partnerships, we saw improved results and expanded commitments in Q2. With eBay we’re seeing an encouraging increase in demand and pricing for advertising both in search and display and we continue to expand the partnership, having recently added Yahoo! Paypal Checkout to the other areas of business collaboration.”

What Yahoo! Would Get

PayPal – eBay already beats Yahoo!’s chief rival Google in one area: Internet payment processing and money transfer. Though Google Checkout has gained some traction with larger merchants, PayPal remains the ubiquitous payment system on the Internet for individuals and businesses who can’t afford or don’t want a full merchant account. Integrating PayPal across Yahoo! properties makes a lot of sense for both companies. It means more PayPal users for eBay, and new services for Yahoo! to offer to advertisers and merchants.

Skype – When eBay bought Skype, the wisdom of the purchase was questioned. A lot of people couldn’t figure out how Skype fits into eBay’s core services. The PC-to-PC calling software makes a lot more sense in the Yahoo! universe, and a Skype + Yahoo! Messenger integration would be a match made in heaven and would make for a killer messaging platform that would be one of the largest on the web.

StumbleUpon – In May I wrote that social bookmarking sites “offer a wealth of user-vetted data that could be used to augment search results in a positive way.” eBay and Yahoo! each control two of the top bookmarking and site ranking web sites. By combining data from StumbleUpon and del.icio.us, Yahoo! might be able to greatly improve its search results with people powered information. Del.icio.us tags and descriptions offer context, while StumbleUpon ratings could be used to improve Yahoo!’s algorithmic rankings. Both sites offer valuable usage data.

An Advertising Partner – Right now Yahoo! places ads on eBay’s US site, but Google handles the advertising on eBay’s international properties. A merged company would of course let that Google deal expire.

What eBay Would Get

People, People, People – If there’s once thing Yahoo! has a surplus of, it’s visitors. As the most heavily trafficked collection of web sites in the US, and the third most popular world wide, Yahoo! is bursting with traffic. eBay could benefit greatly being able to use Yahoo! search and services to direct people toward its auctions. Subscribe to beanie baby blogs on MyYahoo!? Bookmark a lot of equestrian sites on del.icio.us? Do a lot of searches for antique bicycle pedals? eBay could use that information to deliver targeted auction ads to users.

A Stronger PayPal – I mentioned PayPal under Yahoo!’s list, but a merger would benefit eBay here as well. TechCrunch is reporting today that Amazon is ready to enter the fray with a new service for web payments. A Yahoo!-eBay merger would help solidify PayPal as a the top payment processing solution on the web in the face of strong competition from Google and Amazon.

Yahoo! Advertising – eBay could offer its sellers access to Yahoo! advertising services. This is a major market that could help Yahoo!’s search ad business with an influx of new customers, and would be a beneficial source for traffic to eBay merchants. A merger could also make it easier for eBay sellers to list their goods on Yahoo!’s Shopping portal.


Conclusion

eBay and Yahoo! are both rivals of Google, but because eBay purchases so much advertising on the Google search engine, they hold a lot of power over the company. In June, when Google tried to hold a party in Boston to promote their PayPal rival the same week that eBay was holding its eBay Live event, eBay pulled its text ads from Google. Google backed off and canceled the party. The prospect of holding that much sway over their bitter search rival could be attractive to Yahoo!

A merged Yahoo!-eBay would create a company that is still half the size of Google on paper, but would have more resources to grow (according to Watchmojo they would double their current cash reserves, for example). As I said before, of all the merger and acquisition talk surrounding Yahoo!, I think a merger with eBay makes the most sense. What do you think? Leave your thoughts in the comments below.

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