Microsoft Offers $44.6 Billion for Yahoo!

Published: February 6, 2008

by Alex Woodie

Microsoft offered to buy Yahoo! for $44.6 billion last week in an unsolicited bid for one of the industry's largest Internet search and online advertising providers. The deal, if approved by Yahoo, would serve as a much-needed infusion into Microsoft's struggling online services business and bolster its ability to compete with rival Google.

Microsoft's offer of $31 per share for Yahoo's stock represented a 62 percent premium over the closing price of Yahoo's stock on Thursday. Microsoft says it's confident the deal--a 50/50 combination of Microsoft stock and cash--would be approved by government regulators and could be closed during the second half of the year. Yahoo, which entertained and then nixed a similar deal from Microsoft a year ago, did not immediately give its approval or disapproval of the deal. The fact that Terry Semel, Yahoo's chairman and former chief executive officer, stepped down from his job just before Microsoft made it known it was going to try a hostile takeover for Yahoo, is a pretty strong indication that Semel is against the idea (as he was a year ago) and that the Yahoo board of directors and its new chairman, Roy Bostock, an advertising market hotshot who was chairman and CEO of MacManus Group and who is also chairman of Northwest Airlines, are really considering Microsoft's offer. (Yahoo maintains that discussion of Semel's departure began months ago.)

Microsoft says the combination of the two companies would benefit all stakeholders involved in the online services business, including shareholders of the two companies, publishers of Internet content, companies that advertiser on the Web, and, of course, consumers. It would benefit everybody, that is, except for Google. In fact, while Microsoft doesn't mention Google, forming a real competitor to the emerging goliath of the Web is the underlying theme in its offer.

"Today, the market is increasingly dominated by one player," says Kevin Johnson, head of Microsoft's Platform and Services Division, which includes the struggling Online Services Business. "The fact is the industry will be better served by having a more credible alternative in areas of search and advertising."

Microsoft rationalized the deal's benefits in terms of the "four pillars of synergy." These pillars include "scale economics," which means having lots of traffic on your search site and for people viewing your content; "combined engineering talent," which refers to developer know-how; "operational efficiencies," which means cost cutting and headcount reduction; and "emerging user experiences," which refers to new offerings in video, mobile, and e-commerce that Microsoft sees the combined company getting into.

In fact, Microsoft has even quantified the hard benefits that that elusive entity, synergy, would bring to the combined company: $1 billion per year. Johnson put the benefits in starker terms. "We have been losing money" in the Online Services Business, he said in response to an analyst's question. "Our plan here would not be to lose money in the future."

But in the end, it's all about blocking Google. A combined Yahoo-Microsoft would have a very strong platform to intercept a big chunk of the online advertising business, which Microsoft says will be an $80 billion business by 2010, up from $40 billion in 2007. Obviously, Microsoft would like to get some of that money, but its desire to keep it out of Google's hands may be even stronger.

Yahoo did not immediately indicate what it thinks of Microsoft's offer of $31 per share, which was made through a letter from Microsoft CEO Steve Ballmer to Yahoo's board of directors on Thursday. In a press release Friday, Yahoo says its board will evaluate the proposal "carefully and promptly" and make its decision based on long-term shareholder value.

Wall Street reacted favorably to Microsoft's offer. Yahoo's stock immediately shot up from about $18 per share to just below Microsoft's $31 offer. Microsoft's share price, in turn, dropped more than 6 percent on news of the offer, a loss of about $18 billion in market capitalization.

During a conference call, Ballmer discussed the talks between Yahoo and Microsoft in late 2006 and early 2007. "A year ago, the Yahoo management team told us it wasn't really the right time to discuss an acquisition," Ballmer says. "We believed then in the benefits of combining the two companies and we believe now in those benefits more than ever. That is why we are making it public today so both sets of shareholders, employees, and customers can understand the incredible opportunity in a combination of Microsoft and Yahoo."