Microsoft Bids $44.6 Billion For Yahoo; Targets Google

February 4, 2008 0

Microsoft went public Friday with a $44.6 billion cash-and-stock bid to acquire Yahoo…

“Microsoft has launched an audacious $44.6bn bid for internet rival Yahoo in a deal designed to create an online advertising powerhouse to rival market leader Google…”

Seeking to reshape the online landscape and create a serious challenger to Google’s advertising revenues with a single bold stroke, Microsoft has made a US$44.6 billion unsolicited bid to buy struggling portal Yahoo.

“In its response, Yahoo called the Microsoft bid “unsolicited” but did not reject it.”

Microsoft’s $44.6 billion bid to buy Yahoo raises a host of branding questions as well as cultural ones.

Microsoft sees profitable synergies from acquiring Yahoo and says the deal would benefit both Microsoft and Yahoo shareholders and accelerate online innovation. Google is currently dominant in online advertising.

Microsoft, which came late to the internet advertising market, is offering Yahoo shareholders $31 a share, a 62 percent premium to Yahoo’s closing stock price on Thursday, with half cash and half Microsoft common stock. The deal would rank as one of the largest dotcom takeovers since AOL and Time Warner merged at the height of the tech stock boom.

The acquisition would be Microsoft’s largest, would offer relief to Yahoo shareholders who have watched the search-engine giant’s stock struggle, and would give Google a fierce competitor for advertising.

“Yahoo officials could not immediately be reached for comment on the offer, which came in the form of a letter to Yahoo’s board of directors.”

“We have great respect for Yahoo, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market,” Microsoft CEO Steve Ballmer said. “We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners.”

Yahoo responded with a one-paragraph statement saying its board would “evaluate this proposal carefully and promptly in the context of Yahoo’s strategic plans and pursue the best course of action to maximize long-term value for shareholders.” It did not give a specific time frame for reacting.

The move comes as the two companies are seeking ways to reel in runaway Web search and advertising leader Google. It also comes as Yahoo cofounder and CEO Jerry Yang seeks ways to make his portal more competitive, launching a restructuring that will eliminate 1,000 jobs and admitting that 2008 will be a year of transition for the Web firm.

“Yahoo cut its revenue forecasts earlier this week and said it would have to spend an additional $300m this year trying to revive the company.”

It has been struggling in recent years to compete with Google, which has also been a competitor to Microsoft.

Microsoft did not mention Google by name in its announcement, but it did indicate that its acquisition bid was aimed squarely at its rival.

In a conference call, Microsoft’s Kevin Johnson said that the combination of the two companies would create an entity that could better compete with Google.

“Today the market for online search and advertising is increasingly dominated by one player, who is consolidating its dominance through acquisition.” “Together, Microsoft and Yahoo can offer a credible alternative.” he said.

The surprise bid may be a sign of how eager Microsoft is to match up with Google. If it lands Yahoo, Microsoft would instantly gain a sprawling Web empire that draws hundreds of millions of users from around the world as well as partnerships with advertisers. There would also be significant overlap: Both Microsoft and Yahoo offer Web mail, instant messaging, search engines and other Web services.

In a conference call Friday morning, Ballmer said that Microsoft and Yahoo “really do share a vision for the potential of online services.”

Microsoft said in its statement that it believes that it can get all of the needed regulatory approvals and that the deal, if ultimately approved by Yahoo shareholders, could be completed in the second half of the year.

The Advertising Competition

The online advertising market is growing fast, from more than $40 billion in 2007 to nearly $80 billion projected by 2010. Today this market is increasingly dominated by one player: Google.

“The combination of these two great teams would enable us to jointly deliver a broad range of new experiences to our customers that neither of us would have achieved on our own,” said Ray Ozzie, chief software architect at Microsoft.

“A year ago the Yahoo management team told us it was not really the right time to discuss an acquisition, we believed then in the benefits of combining the two companies and we believe now in those benefits more than ever,” Microsoft said.

Yahoo’s position has certainly weakened over the past year as repeated delays to the roll-out of its new advertising platform Panama have sent its shares into freefall. Earlier this week Yahoo shares fell to a four-year low as Yang, who replaced long-serving chief executive Terry Semel last summer, announced plans to axe 1,000 jobs following a 24% drop in fourth-quarter profits to $205m.

But while Yahoo has suffered, Google has powered ahead in the online search market — which it comprehensively dominates with a global share estimated at 75% — and made moves into the wider online advertising market.

As Microsoft sees it, the merger would create a more efficient company with synergies in four areas: scale economics driven by audience size and increased value for advertisers; combined engineering talent to accelerate innovation; operational efficiencies by eliminating redundant costs; and innovation in emerging user experiences such as video and mobile.

“Microsoft believes these four areas could be worth at least $1 billion a year.”

“The combined assets and strong services focus of these two companies will enable us to achieve scale economics while reaching R&D critical mass to deliver innovation breakthroughs,” Johnson said. “The industry will be well served by having more than one strong player, offering more value and real choice to advertisers, publishers and consumers.”

Michael Gartenberg, an analyst at Jupiter Research, said it is “clear that there is increased pressure on Microsoft from Google, and they recognize that. Way back when, Yahoo was not that interested in a Microsoft deal. What a difference two years make. Microsoft has a pile of money, and Yahoo has experienced problems of its own. Ballmer, in the past, has historically not loved these types of deals. It is indicative of how different the world is now.”

Gartenberg added that the deal “absolutely” makes sense. “But there is a lot to be done in the details. Getting this deal done might be the easiest part. The real challenge is what happens when they finish the deal. This is not a panacea — the details will be what matters,” he said.

“If Yahoo accepted the offer, competition authorities both in the US and the European Union would be likely to investigate the tie-up.”

The combination would almost certainly face close scrutiny from regulators in both the U.S. and Europe, where Microsoft has banged heads with antitrust overseers and where the Google-DoubleClick merger is still being pored over by regulators. Still, Microsoft expressed confidence the deal could pass muster and be closed in the second half of the year.

Regulators in the U.S. will face a “tough balancing act” in reviewing the deal since they recently approved the Google-DoubleClick tie-up over the objections of Microsoft and others, said David Lisi, a partner with the Palo Alto law firm of Howrey.

“It may be hard for them to justify a challenge to Microsoft Yahoo,” Lisi said in a statement. Still, “privacy concerns are greater here given the large market share a combined Microsoft/Yahoo entity will have in free e-mail accounts and instant messaging services as well as other interactive media services, which create a potential for a single provider to serve as a gatekeeper to these popular services and allows them potentially to collect large amounts of information from users.”

Similarly, in Europe the deal could face opposition on privacy grounds as well as questions about the impact on competition. “Certainly there will be concerns about whether and how Microsoft intends to bundle Yahoo technology and products with its existing operating system,” he added. “There will be concerns about Microsoft’s search engine being combined with Yahoo, although Google may still have a clear dominant market position there.”

The news boosted shares in London, sending the FTSE 100 back through the 6,000 level. On Wall Street, shares in Yahoo surged almost 50%, to $28.26, while Microsoft fell 5% to $30.94. Google tumbled 9% to $512.90 as analysts anticipated the potential impact of a Microsoft-Yahoo tie-up on its business.

“But the firm’s takeover approach will be seen by many in the internet industry as extremely opportunistic.”

Imran Khan of J.P. Morgan Securities thinks that regulators will approve the deal.

“Yahoo is better off inside a larger company with a strong balance sheet and technology,” Khan wrote in a research note. A merger of Microsoft and Yahoo could give them the scale, in terms of search traffic, that they need to compete against Google and provide a boost on the ad side, he added.

“A combination of Yahoo’s relationships with DSL providers, and Microsoft’s applications and devices, could create a very well positioned potential competitor,” Khan wrote.

“Microsoft’s financial advisers are Morgan Stanley and The Blackstone Group.”

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