An open letter to Steve Ballmer (that he actually might read)

It's puzzling why big companies like Microsoft hire expensive investment bankers to advise them on deals, when clever journalists like BusinessWeek's Arik Hesseldahl are willing to tell them what to dofor free! Of course, Hesseldahl takes three pages to get to the point on what Microsoft should do with Yahoo. Why do bankers get paid so much? Because they don't waste a busy CEO's time. Here's a readable version of Hesseldahl's memo.

An Open Letter to Steve Ballmer by Arik Hesseldahl

Dear Steve,

Let's talk over this Yahoo thing. It's a profoundly bad idea. Big mergers practically never work. IBM and Rolm in 1984, AT&T and NCR in 1991. Lucent and Ascend. Compaq and Digital Equipment, followed by Compaq and Hewlett-Packard. Time Warner and AOL. The standard pitfalls: brain drain from departing employees, political turf wars amid clashing cultures, morale-depleting anxiety, customers going to less-distracted rivals like Google.

The Microhoo online operation could make $1 billion a year in profit down the road. But is it really worth blowing $41.5 billion in cash and stock? That investors have wiped $3 billion off the value of that offer in a week should tell you something.

If someone took Microsoft Office away from me, I could get by using a Web-based office suite. You should have had Office on the Web five years ago. You've been wasting time, effort, and attention trying to be a consumer electronics company, a digital media company, and now an online advertising company. Microsoft is a software company. Everything else is superfluous.

Desktop software is one of many things Microsoft is awfully good at, and you make a pile selling it. Then there's server software and Microsoft Office. Between those three units, you've got a $43 billion business that's generating 62% operating profit margins.

Here's what you should do: Package Yahoo with your online services division, the entertainment and devices division (yes, the Xbox, too), and spin the whole thing off. Keep an equity stake, even a majority. If you force these businesses to fester within Microsoft, they will always play second fiddle to Windows.