Microsoft said Friday it is willing to offer $44.6 billion for Yahoo. The deal, to be be paid in cash and shares, values the search engine company 62 percent above its closing share price on Thursday.
Microsoft’s bid – which was sent in a letter to Yahoo’s board of directors – comes just days after Yahoo slashed earnings forecasts.
At the same time, Yahoo said that it would need to spend a further $300 million this year to jumpstart the company and to face off competition from Google.
Google is also a competitor of Microsoft.
On that backdrop, Microsoft chief executive Steve Ballmer said that "We have great respect for Yahoo, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market.”
The online advertising market is growing at a very fast pace, from over $40 billion in 2007 to nearly $80 billion by 2010. The resulting benefits of scale along with the associated capital costs for advertising platform providers make this a time of industry consolidation and convergence. Today this market is increasingly dominated by one player. Together, Microsoft and Yahoo! can offer a competitive choice while better fulfilling the needs of customers and partners.
Chris Morrison at Venturebeat noted that “the acquisition offer comes both as Yahoo’s stock has fallen far below an October high, and a day after it was announced that Yahoo chairman and former CEO Terry Semel has resigned entirely. Semel rebuffed a merger offer from Microsoft almost exactly a year ago.”
“The combined assets and strong services focus of these two companies will enable us to achieve scale economics while reaching R&D critical mass to deliver innovation breakthroughs,” said Kevin Johnson, president of the Platforms & Services Division of Microsoft. “The industry will be well served by having more than one strong player, offering more value and real choice to advertisers, publishers and consumers.”
The combination will create a more efficient company with synergies in four areas: scale economics driven by audience critical mass and increased value for advertisers; combined engineering talent to accelerate innovation; operational efficiencies through elimination of redundant cost; and the ability to innovate in emerging user experiences such as video and mobile. Microsoft believes these four areas will generate at least $1 billion in annual synergy for the combined entity.
Microsoft has developed a plan and process that will include the employees of both companies to focus on the integration of the combined business. Microsoft intends to offer significant retention packages to Yahoo! engineers, key leaders and employees across all disciplines.
“It is one of the truths about the Internet that it encourages much greater business diversity in general. But by its global nature, the companies that actually run the Internet will always tend towards monopoly,” noted Charlie Becket at The Director's Blog for the public media forum at the London School of Economics and the London College of Communication. “Microsoft is actually on the up at the moment with a massive 79% increase in trading during the last quarter of last year. While Google’s profits (up a mere 17% to $1.2 billion) had failed to excite the markets. But rival Yahoo!’s profits had fallen by nearly a quarter to $200 million at the same time. Not chicken feed, but in global internet business terms, not big potatoes either.”
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