Microsoft makes unsolicited bid for Yahoo
REDMOND, Wash. - Microsoft has pounced on slumping Internet icon Yahoo with an unsolicited takeover offer of $44.6 billion, seeking to join forces against Google in what would be the biggest Internet deal since the Time Warner-AOL merger in 2001.
The surprise offer of $31 per share, made late Thursday and announced Friday, seizes on Yahoo’s weakness while Microsoft tries to muscle up in a high-stakes battle with Google likely to define the technology landscape for years to come.
Yahoo repeatedly has rebuffed Microsoft’s advances in the past but in a statement Friday the company said it will “carefully and promptly” study the bid. The Justice Department also said it would be interested in reviewing the antitrust implications of the offer, and analysts expect other enforcement agencies to follow suit.
With its profits steadily sliding, Yahoo’s stock slipped to a four-year low this week, and a new management team has been trying to steer a turnaround but sees more turbulence through 2008. Yahoo Chairman Terry Semel, who had rejected an earlier bid from Microsoft, resigned from the company’s board Thursday.
Yahoo co-founder Jerry Yang, still one of the company’s biggest shareholders, took over as chief executive last year after Semel was forced to step aside. Former advertising executive Roy Bostock, who has been on Yahoo’s board since 2003, was named chairman Thursday.
The announcement of the Microsoft bid lifted Yahoo’s share price by almost 50 percent in Friday trading, while Google fell almost 8 percent, dragged down by a fourth-quarter earnings report that missed Wall Street expectations.
In conference call Friday morning, Microsoft Chief Executive Steve Ballmer indicated he won’t take no for an answer after Yahoo rebuffed takeover overtures a year ago.
“This is a decision we have — and I have — thought long and hard about,” Ballmer said. “We are confident it’s the right path for Microsoft and Yahoo.”
To underscore its resolve, Microsoft is offering a 62 percent premium to Yahoo’s closing stock price Thursday. If the deal is consummated, it would be by far the largest acquisition in Microsoft’s history, eclipsing last year’s $6 billion purchase of online ad service aQuantive.
Jordan Rohan, an analyst with RBC Capital Markets, said there was no way Yahoo shareholders could turn down the offer.
“The company has been floundering, and this is a great way to save face,” he told CNBC. “Management has no reasonable out here.”
Microsoft publicly disclosed its cash-and-stock offer in hopes of rallying support from Yahoo’s shareholders, making it more difficult for Yahoo’s board to turn down the bid.
“It puts a lot of public pressure right at the point where Yahoo’s management seems vulnerable,” Rohan said.
In a letter released Friday, Ballmer pointedly noted Yahoo’s financial performance has deteriorated since Microsoft was spurned a year ago. At that time, Ballmer said he was told Yahoo believed it was better off on its own.
“A year has gone by, and the competitive situation has not improved,” Ballmer wrote in his letter.
Microsoft sent its latest takeover offer to Yahoo late Thursday, shortly after Semel resigned as chairman.
In a prepared statement, Yahoo said its board “will 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.”
Microsoft views Yahoo as its best chance to thwart Google, which has leveraged its leadership in Internet search and advertising to emerge as an increasingly serious threat to the world’s largest software maker’s persuasive influence on how people interact with computers.
Google already controls nearly 60 percent of the U.S. search market, and has been widening its lead, despite concerted efforts by both second-place Yahoo and third-place Microsoft. By combining, Microsoft and Yahoo would have a 33 percent share of the U.S. search market, according to the latest data from comScore Media Metrix.
Nevertheless, the potential acquisition of Yahoo would raise questions on competitiveness about everything from search engines to online advertising, analysts said. A federal judge this week extended by 18 months court oversight of Microsoft’s market power, which began in 2002 after a landmark antitrust settlement.
“If this deal goes through, there will be a lot of very close scrutiny … there appears to be lots of overlap,” said Harry First, a professor at New York University’s School of Law. “It’s complicated and very big, and a lot of enforcement agencies will be interested.”
But Keith Hylton, a professor of antitrust law at Boston University, said Google’s success in online search and advertising means a combined Microsoft-Yahoo would have significant competition.
“The fact that Google dominates this business will be a big factor in their (Microsoft’s) favor in trying to get this approved by the regulators,” Hylton said.
By joining forces, Microsoft and Yahoo also would widen their narrowing advantage over Google in providing free e-mail accounts — a service that helps foster more loyalty with users and create more advertising opportunities.
Advertisers around the world are expected to double their spending on the Internet during the next three years as more people get their news and entertainment on the Web instead of television, radio, newspapers and magazine. The trend is expected to create an $80 billion online ad market in 2010, up from an estimated $40 billion last year.
Despite an aggressive push in recent years, Microsoft’s online advertising expansion hasn’t paid off. Last week, the Redmond, Wash.-based company reported a 79 percent jump in its overall profit, but its online division’s loss widened to $245 million.
And Yahoo has been struggling to attract more advertising even though its Web site attracts one of the biggest audiences. The Sunnyvale-based company’s profit has declined for five consecutive quarters, prompting plans to cut 1,000 jobs later this month, a 7 percent reduction of its 14,300-employee work force.
Besides helping to boost its online ad revenue, Microsoft believes it could mine more profit from Yahoo by jettisoning workers and eliminating overlapping operations.
Microsoft said it sees at least $1 billion in cost savings if it buys Yahoo. Combined with Yahoo’s profits that would generate free cash flow of $2 billion a year on an investment of $45 billion for a return of nearly 5 percent, according to Rohan of RBC.
“This doesn’t change the popularity of the Yahoo or MSN brands in the eyes of consumers, but what it does is it creates one large, more efficient competitor to Google,” Rohan said.
Microsoft executives deflected questions about how many jobs might be lost, but the company emphasized retention packages will be offered to Yahoo engineers and other key employees, including some executives.
The fate of Yahoo’s brand also is unclear if Microsoft takes over. Both Ballmer and Kevin Johnson, president of Microsoft’s platforms and services division, hailed Yahoo’s strong brand value but didn’t commit to keeping the name alive.
