The surprise takeover bid aims to challenge Google’s dominance of the lucrative online search and advertising markets.
From Times Staff and Wire Services
8:29 AM PST, February 1, 2008
Microsoft Corp. has pounced on slumping Internet icon Yahoo Inc. with an unsolicited takeover offer of $44.6 billion in its boldest bid yet to challenge Google Inc.'s dominance of the lucrative online search and advertising markets.
The surprise offer of $31 per share, made late Thursday and announced today, comes with Sunnyvale, Calif.-based Yahoo in a vulnerable position.
In a statement today, Yahoo said it will "carefully and promptly" study Microsoft's bid.
With its profits steadily sliding, Yahoo’s stock slipped to a four-year low earlier this week and a new management team has been trying to steer a turnaround but sees more turbulence through 2008.
The announcement sent Yahoo’s share price up 60% in premarket trading, while Google fell 8%, weighted down by a fourth-quarter earnings report that missed Wall Street expectations.
In a letter to Yahoo’s board of directors, Microsoft Chief Executive Steve Ballmer indicated that the world’s largest software maker is determined to bring the two companies together.
To underscore its resolve, Microsoft is offering a 62% premium to Yahoo’s closing stock price Thursday.
Since reaching a 52-week high of $34.08 in October, Yahoo shares have fallen 46%. In morning trading, Yahoo shares rose $9.09, or 47%, to $28.27. Microsoft fell $1.65 to $30.95, a 5% decline. And Google shares were off $47.32 to $516.98, an 8% decline.
In his letter, Ballmer revealed that Yahoo had rebuffed a previous overture a year ago, saying it had a turnaround in the works. But he pointedly noted Yahoo has instead deteriorated significantly.
“A year has gone by, and the competitive situation has not improved,” Ballmer added.
Microsoft’s previous offer was rebuffed by Terry Semel, who stepped aside last year as chief executive under shareholder pressure.
Microsoft sent its latest takeover offer to Yahoo late Thursday, shortly after Semel resigned as the company’s chairman. The letter is addressed to Semel’s successors, new Chairman Roy Bostock, and the current chief executive, co-founder Jerry Yang, who is one of Yahoo’s largest shareholders.
“Microsoft’s consistent belief has been that the combination of Microsoft and Yahoo clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers,” Ballmer wrote.
One key question hanging over the proposed deal is whether bigger is actually better.
Google holds a commanding 75% market share in paid online search, with Microsoft and Yahoo splitting about 20%. Just putting that 20% under the same roof doesn’t necessarily change the competitive landscape, experts said.
But Microsoft officials, in this morning’s conference call to discuss the bid, implied that Yahoo possesses engineering talent that its bigger rival doesn’t have in house.
Ballmer said he has already received expressions of encouragement from industry players --presumably including advertisers – who are increasingly fretful about Google’s dominance.
“A lot of people want an alternative to Google,” said Standard & Poor’s analyst Scott Kessler.
Kessler upgraded Yahoo’s stock to “buy” on Monday but not due to any prescience about the Miscrosoft bid, he said. It was more a case of the negatives about Yahoo already being priced into its stock, he said.
Some have already raised concerns about the ramifications of a combined Microsoft and Yahoo.
Jeff Chester of the Center for Digital Democracy has called on Congress and the Federal Trade Commission to enact safeguards to protect consumer privacy as a Microsoft purchase of Yahoo would create a duopoly in online media with Google Inc.
“Google and Microsoft will have inordinate power to shape the online communications marketplace, including journalism, entertainment and advertising,” Chester said in a statement this morning. “The once most potentially democratic of all mediums – the Net – is being shaped by the same powerful forces that consolidated the ‘older’ media of broadcasting and newspapers. There are consequences to democratic societies.”
As news of the deal continues to develop this morning, the Justice Department says it is “interested” in reviewing the competitive effects of the proposed deal.
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.”
Under the terms of the proposed deal, Yahoo shareholders could choose to receive cash or Microsoft common shares, with the total purchase consisting of 50% cash and 50% stock.
Microsoft said it sees at least $1 billion in cost savings generated by the combination, and intends to offer significant retention packages to Yahoo engineers, key leaders and employees. J.P. Morgan analyst Imran Khan told clients in a note this morning that Yahoo’s board of directors probably would approve the deal and said Yahoo would grow faster within Microsoft. Khan recently predicted that online search advertising growth would slow a little in the United States this year, but still would rise 31% to $15.5 billion, from an estimated $11.8 billion in 2007.
The software giant said it believes the takeover would receive regulatory clearance and close in the second half of 2008.
Signaling Microsoft doesn’t intend to take no for an answer, Ballmer wrote that the company “reserves the right to pursue all necessary steps to ensure that Yahoo’s shareholders are provided with the opportunity to realize the value inherent in our proposal.”
While Yahoo is struggling, Microsoft is thriving. The Redmond, Wash.-based company last week forecast a rosy 2008 – despite broader economic worries – after it blew by Wall Street’s expectations for a second consecutive quarter.