Microsoft Stuns Industry with $44.6 Billion Bid for Yahoo

Microsoft’s stunning $44.6 billion bid today for rival Yahoo makes its once-whopping $6 billion aQuantive acquisition seem wimpy. If accepted, Microsoft would purchase outstanding shares of Yahoo common stock for $31 per share, 62 percent higher than the closing price of the stock yesterday.

In its continuing quest to become a dominant player in the online advertising industry, Microsoft believes the best way to catch up with Google is to join forces with Yahoo. The two competitors have tossed around the idea of forming an alliance in the past.

Calling the proposal “unsolicited,” Yahoo issued a statement noting its Board of Directors will evaluate the offer “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.”

The ultimate goal from Microsoft’s point of view is to morph the two firms’ search indexes and ad platforms to reduce redundancies in support systems, improve efficiency, and ramp up publisher yield and ad inventory to a potentially massive scale for advertisers.

Microsoft, Yahoo: At a Glance
Microsoft* Yahoo**
Annual Revenue $51.1 billion $6.97 billion
Net income $18.5 billion $660 million
Cash, short-term investments as of 12/31/07 $21.7 billion $2.4 billion
Employees 79,000 14,300
Of Top 20 Ad Publishers, Share of Online Display Ads, 11/07 6.7 percent 18.8 percent
Web Site, Unique Visitors in 12/07 123.2 million 114.1 million
Web Site, Time Per Person in 12/07 2 hours, 8 minutes 3 hours, 5 minutes
Search Queries in 12/07 940 million 2.2 billion
*Microsoft’s annual revenue, net income based on fiscal year ended June 30, 2007.
**Yahoo’s earnings are for fiscal year ended Dec. 31, 2007
Web site visitor statistics are provided by Nielsen Online.
Search query and online display ads statistics are provided by comScore.

“In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together…While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing,” wrote Microsoft CEO Steve Ballmer in a letter sent to Yahoo’s board of directors yesterday.

At that time, a merger had also been proposed, but was rejected by Yahoo’s board, according to the missive. However, as noted in the letter, Yahoo’s board has expressed interest in an acquisition by Microsoft since February 2007.

Yahoo has struggled to keep up with the changing pace of the interactive ad industry. Although the company has shown dedication to righting its course, constant restructuring and staff turnover, in addition to a series of disappointing financial reports, have dogged the firm.

Adding to the disruption, Chairman and former Yahoo CEO Terry Semel ended his chairmanship on Thursday, the day Microsoft’s letter reached members of Yahoo’s Board. Board member Roy Bostock will take his place.

During Yahoo’s Q4 2007 earnings announcement this week, CEO Jerry Yang said “profound changes” are on the horizon for the company, including layoffs of about 1,000 staffers by mid-February. The company currently has some 14,300 employees.

Microsoft said it has put an integration plan in place, and intends to offer retention packages to key Yahoo employees. According to Kevin Johnson, president of Microsoft’s Platforms and Services Division, the integration plan is based on recent integrations of digital ad services firm aQuantive and voice-enabled mobile search provider Tellme.

Ballmer suggested the combined companies would create broader scale in search and non-search ad offerings, operational efficiencies, and technological prowess. “The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform,” he wrote, adding, “Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.”

Until its name was finally mentioned, Google seemed like the elephant in the room during a conference call Microsoft held this morning to discuss the proposition. “The fact is the industry will be better served by having a more credible alternative” in search and advertising, said Johnson, without actually uttering the G-word.

Eventually, though, Google was named outright. Because of its towering market share, “Google’s clearly prevented by the antitrust laws from buying Yahoo or buying this business from Yahoo,” Johnson continued.

While Google’s acquisition of DoubleClick remains stalled by the European Commission, Microsoft believes its proposed Yahoo buy would pass regulatory inspection by second half of calendar year 2008.

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