February 01, 2008, 8:19 AM — Microsoft has offered
to buy Yahoo for around US$44.6
billion in cash and shares, to better compete with Google
in the market for online services.
CEO Steve Ballmer made the offer in a letter to Yahoo's board of directors
on Thursday, telling the board that he would release the letter Friday morning.
On a conference call Friday, Microsoft's President of its Platforms & Services
Division Kevin Johnson called a combination of Microsoft and Yahoo a more "credible"
alternative to Google in the online advertising and services market.
"By combining the assets of Microsoft and Yahoo we can offer a more competitive
choice for consumers, advertisers and publishers," he said.
It was Yahoo's board that first approached Microsoft, in February 2007, Microsoft
said.
Yahoo, in a statement, said its board will carefully evaluate Microsoft's proposal,
which it described as unsolicited.
Microsoft expects the market for online advertising to almost double in size
over the next three years, from $40 billion in 2007 to $80 billion by 2010.
A merger will allow it to realize economies of scale and reduce capital costs
as it addresses this market, it said.
Microsoft expects to cut costs by $1 billion a year by realizing synergies
with Yahoo in four areas: obtaining economies of scale as its audience increases;
combining its research and development efforts with Yahoo's to innovate faster;
eliminating operational redundancy to cut costs, and pooling expertise to innovate
in video and mobile.
The companies will work together to develop the merger plan, Microsoft said.
It intends to pay key Yahoo engineers and other staff to stay following the
merger.
The offer represents a 62 percent premium over Yahoo's closing price on Thursday.
Microsoft expects to receive all necessary approvals in the second half of this
year.
Despite the potential for short-term gain, Yahoo, in its statement, said its
goal will be to maximize long-term value for shareholders.
At this premium, even if Yahoo's top managers were opposed to the acquisition,
Yahoo's board of directors has an obligation to consider the offer on behalf
of shareholders, said industry analyst Greg Sterling from Sterling Market Intelligence.
At the same time, now that Microsoft has made its move, it wouldn't be surprising
to see other suitors jump in and make competing bids for Yahoo, Sterling said.
Unless Microsoft were to run Yahoo like an independent unit, there will be
significant areas of overlap that would need to be integrated.
"If Microsoft were to seek a more integrated company [with Yahoo], certain
products or brands would be favored and others discontinued," Sterling
said.
Still, a joint Microsoft-Yahoo would from day one be a formidable player in
display advertising and mobile Internet services, he said.
Ever since the first rumblings about a possible acquisition of Yahoo by Microsoft,
things have gone downhill for Yahoo, including several reorganizations and management
shakeups, so the deal appears more plausible today, Sterling said.
At the same time, despite considerable investments, Microsoft hasn't made as
much progress in search engine advertising and usage as it had hoped, he said.
This is something Ballmer acknowledged candidly on Friday's conference call,
though the company had been trying to paint a rosy picture of its online advertising
market growth since it acquired digital media services firm aQuantive last year.
However, the company's online services business has long suffered from lackluster
performance, something he said should change once Yahoo is on board.
"We've been losing money [in online services], our plan here is not to
lose money in the future," Ballmer said.
A combined Microsoft-Yahoo would improve their respective positions in the
search market, but still wouldn't top Google, which has a dominant lead both
in search engine usage and advertising, Sterling said.
As Microsoft seeks to grow its online advertising business, it needs to achieve
"critical mass" in three key segments -- advertisers, publishers and
consumers, Ballmer said. While Microsoft's aQuantive acquisition boosted the
advertiser and publisher rosters, a Yahoo acquisition would significantly bolster
the consumer piece of the strategy.
