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Yahoo sale could be bad for the minnows

While the dot-com bust continues to cast a shadow, Internet advertising is booming

By Brad Stone and Miguel Helft  /  NY TIMES NEWS SERVICE , SAN FRANCISCO

Slide chief executive Max Levchin, 32, sits outside the company's office in San Francisco, on June 22, last year. Levchin says that the US is on the road to recession and that Silicon Valley start-ups could be headed for a venture capital-mandated round of belt tightening. So Levchin, who co-founded PayPal, a company that successfully weathered the dot-com crash, decided to take the money while the going was good: He recently raised US$55 million in additional financing for Slide, a company that makes video and photo-sharing tools.

PHOTO: NY TIMES NEWS SERVICE

For decades, Silicon Valley has been the land of eternal optimism and high anxiety, traits that pitch into overdrive any time a seismic business event washes across the corporate and entrepreneurial landscape here -- like, for example, Microsoft's blockbuster US$45 billion bid for Yahoo on Friday.

The legions of high-tech entrepreneurs who have set up camp here with clever ideas, a willingness to scramble for financing and the energy to weather round-the-clock days have typically tethered their dreams to a singular outcome: getting fabulously rich by selling to one of the three Internet giants, Microsoft, Google or Yahoo.

But if Microsoft's takeover bid for Yahoo succeeds, that calculus becomes more harrowing because of a simple reality: The field of large, lushly endowed suitors will narrow by one. And that is a fact sure to jangle nerves already strained by growing fears of an economic recession.

"From a start-up and investor perspective, if there are more companies trying to vie for the same businesses, there are more exits," said Bismarck Lepe, a former Google employee and now chief executive of Ooyala, a year-old video host and advertising company. "It's not great for competition if there are only two acquisition targets instead of three."

To be sure, a Microsoft-Yahoo deal could be good for Silicon Valley, funneling money into the economy and triggering a round of copycat deals as other players like Google and the News Corp. look to keep up.

But Microsoft is buying Yahoo because it has steadily fallen behind Google in the lucrative online search market and because the future of computing may not be forever linked to the desktop market that Microsoft now dominates. Apparently unable to keep up with Google through internal efforts, the legendary software giant in Redmond, Washington, has gone outside to solve its problems by trying to buy Yahoo.

So the rationale for Friday's proposed mega-deal is based on Microsoft's own particular corporate needs and may not be a harbinger of rampant deal-making in the Valley.

Moreover, with an economic recession looming nationally, the unsolicited bid for Yahoo comes at a difficult time for the normally cocksure world of high tech. Visibly, much of the region maintains an almost obstinate belief that it can weather any economic storm that emerges. Consumers are still flocking online, advertising is following, and the current generation of start-ups has been built frugally -- with lessons from the dot-com bust of several years ago still very much in mind.

Venture capitalists also raised nearly US$35 billion last year, more than at any other time since before the dot-com crash, according to the National Venture Capital Association. Those financiers are ready to make bets on countless entrepreneurs who hope to build the next Google, Facebook or YouTube.

But as the stock market lolls and an outsider, Microsoft, bids to gobble up a company that once was one of Silicon Valley's crown jewels, the region's innovators and corporate stewards appear to be growing ever more anxious. That trait is most visible in the top executives at public companies whose eyes are trained on parallel declines in consumer confidence and public equities.

Shares of Google had dropped nearly 20 percent since the beginning of the year -- and then they fell an additional 8.6 percent on Friday after Microsoft made the play for Yahoo. Apple has dropped 33 percent since the start of the year. That was enough to prompt Steven P. Jobs, Apple's chief executive, to send a reassuring memo to options-sick employees last week that concluded: "Hang in there."

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