Throughout the current Web 2.0 boom, Microsoft and Yahoo! – joined by Google, TimeWarner’s AOL and News Corp - have driven the Internet M&A market and provided exits for numerous VCs and entrepreneurs. This weekend, however, Microsoft withdrew its largest-ever acquisition bid - for Yahoo! itself.

The saga may not yet be finished, since Microsoft could renew its bid after Yahoo!’s share price deteriorates and after disgruntled investors pressure the company’s management (Yahoo!’s top two institutional shareholders are already publicly fuming about the botched deal). Whether the Microsoft/Yahoo! merger is realised or not, one thing is clear: the discussion has sidelined two major acquirers of Internet startups.

Microsoft has been an extremely active acquirer on both sides of the Atlantic, purchasing European Internet startups such as Israel’s Kidaro, Norwegian enterprise search company FAST, The UK’s Multimap, and French mobile search company MotionBridge. Yahoo! has played an insignificant role in European Internet M&A to date, but is a key player in the US.


A platform business at heart

There is now press and analyst speculation that the nearly $50 billion (€32.2 billion) which Microsoft was prepared to pay for Yahoo! will go instead towards other acquisitions. The most commonly cited target is AOL, which TimeWarner appears willing to offload and which would provide the nearest approximation of the scale in the online advertising business that a merger with Yahoo! would have achieved. Yet smaller businesses have also seen their names thrown into the discussion: PaidContent suggests that online services like Facebook, Twitter or Digg are now possible acquisition targets for Microsoft.

These latter options are unlikely, because at its heart Microsoft is a platform business, not a content business. Like other technology platform businesses, from Oracle to Qualcomm, Microsoft’s business model is to ensure the dominance of its own software by making that software an essential part of other developers’ business models. This holds true not only for Microsoft’s Windows and Xbox platforms, but also for the company’s online advertising network, which is only as successful as the money publishers make using it.

Microsoft has clear ambitions to challenge Google as an online advertising network, and though Yahoo! would also have given Microsoft the US’s most popular web portal - Yahoo! web properties are more visited than Google’s in that country - the main driver for the proposed acquisition was for Microsoft to quickly build substantial scale in the online advertising business. Microsoft’s largest acquisition to date, the $6 billion (€3.9 billion) purchase of online advertising firm aQuantive in May 2007, provided Microsoft with a foothold but left the company with nowhere near the market share of Google, Yahoo! or AOL in either search or display advertising.

Furthermore, Microsoft has already tried smaller acquisitions in the space. Besides aQuantive, Microsoft acquired a slate of advertising companies over the past two years, including Israel’s YaData; the US’s AdECN, Massive and DeepMetrix; and France’s ScreenTonic. Yet what Microsoft needs now is scale, and Yahoo! and AOL are the only two players who can provide it.


Yahoo! preoccupied

As for Yahoo!, the potential merger has imperiled the company’s status as a major Internet acquirer. Firstly, Yahoo!’s engineering culture, reinvigorated 3 years ago through a series of critical acquisitions including del.icio.us and Flickr, has been crucial to the success of its more recent acquisitions. That culture is now at risk; as Om Malik points out, morale is undoubtedly low at Yahoo!, which will make retention of key employees a problem. Despite holding $2.61 billion (€1.68 billion) in the bank, Yahoo! will face inevitable challenges and potentially lawsuits from investors over the handling of the Microsoft offer, making immediate acquisitions difficult.

The silver lining is that neither a combined Microsoft/Yahoo!, a combined Microsoft/AOL or an independent Yahoo! are truly a match for Google’s online advertising business, particularly in search advertising. Any of those combinations would still necessitate the roll-up of additional online advertising networks, such as Germany’s Adconion Media Group, as well as the acquisition of innovative providers of advertising technology, such as Israel’s Kontera Technologies or Luxembourg’s wunderLOOP. Though neither Microsoft nor Yahoo! are likely to pursue smaller acquisitions in the short term, given time either could re-emerge as a buyer for European Internet startups.

Revolymer, the UK-based polymer chemistry technology company, has raised £10m (€12.5m) third round funding from Lehman Brothers, Naxos Capital, Sloane Robinson Private Equity and return investors Top Technology Ventures and Swarraton Partners. Revolymer is a fast moving consumer goods (FMCG) polymer company specialising in the development of intelligent polymers with enhanced physical properties. The funding is to be used to accelerate the commercialisation of its removable chewing gum and nicotine gum.

SelStor, the Sweden-based storage system developer, has raised £15m (€18.8m) first round funding from Smedvig Capital. SelStor designs and develops flexible self-storage systems for individuals and companies. The funding is to be used to develop a portfolio of storage sites in Sweden.

Prime Sense, the Israel-based 3D machine vision technologies company, has raised $20.4m (€13.2m) second round funding from new investor Canaan Partners and return investors, Gemini Israel Funds and Genesis Partners. Prime Sense develops 3D technologies for the digital entertainment systems market, specialising in the development of intuitive full body interaction for gaming, gesture based interface and background replacement for video communication/chat and self generated content applications.

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RealViz, the France-based developer of image-based creation software, has been acquired by Autodesk for an undisclosed amount. Autodesk intends to integrate RealViz's stand alone products into future versions of the company's existing products.

Tevet Process Control Technologies, the Israel-based developer of semiconductor process control devices, has been acquired by Nanometrics for an undisclosed amount. The deal has enabled Nanometrics to add Tevet's IM products to its portfolio of metrology solutions.

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Mpathy Medical Devices, the UK-based developer of medical devices, has appointed Ian Stevens to the position of chief executive. Prior to joining the company, Mr Stevens held the position of general manager North America at Optos, after serving as the company's chief financial officer. Before this Mr Stevens worked for KPMG, following his career as an accountant in the Royal Air Force.

Green Biologics, the UK-based industrial biotechnology company, has appointed Sean Sutcliffe to the position of chief executive. Prior to joining the company, Mr Sutcliffe was the chief executive officer of Biofuels Corporation Trading, a position he held from 2005 to 2008. Before this Mr Sutcliffe spent 14 years at BG Group, holding a variety of senior management positions. Mr Sutcliffe is chairman of Tidal Generation and a trustee of the charity Practical Action.

Velocix, the UK-based digital asset delivery network, has appointed John Lee to the position of chief financial officer. Mr Lee joins the company from Cambridge Semiconductor, where he held the positions of chief financial officer and director. Prior to this, Mr Lee held various positions at technology start-ups, including Twyford International and Sinclair Research.

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Inside Contactless, the France-based fabless semiconductor company, has informed Library House that following the its Janurary funding round, the company is focusing on product development and its imminent international expansion. Mr Renny de Tonnac, the chief executive of Inside Contactless, informed Library House that the company expects to reach profitability in the first half of 2010. Mr de Tonnac also revealed that the company intends to exit via IPO in the next 18-24 months.

Lysanda, the UK-based developer of vehicle emissions management systems, has revealed to Library House that the company has closed its second round of funding in May 2008. The company raised £1.25 (€1.57) from LogiSpring, private investors and return investor, E-Synergy.Simon Harris, Lysanda's sales and marketing director, revealed to Library House that he expects that the company will reach profitability in 2011 and that he expects it to exit via trade sale.

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