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Originally published February 1, 2008 at 12:00 AM | Page modified February 1, 2008 at 9:32 PM

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Microsoft makes $42B bid for Yahoo

Unable to topple Google Inc. on its own, Microsoft Corp. is trying to force crippled rival Yahoo Inc. into a shotgun marriage, betting nearly...

The Associated Press and Seattle Times Staff

SAN FRANCISCO — Unable to topple Google Inc. on its own, Microsoft Corp. is trying to force crippled rival Yahoo Inc. into a shotgun marriage, betting nearly $42 billion that the two companies together will have a better chance of tackling the Internet search leader.

Microsoft's audacious attempt to buy Yahoo, spelled out in an unsolicited offer announced Friday, shows just how much Google threatens the world's largest software maker's grip on how people interact with computers.

"At the end of the day, this is about creating a more compelling alternative to an increasingly dominant player in the industry," Kevin Johnson, president of Microsoft's Platforms and Services Division, said in an interview The Seattle Times.

"You know, the fact is that this is an industry where scale matters. And by combining our resources with Yahoo, not only are we able to achieve scale economics, we're able to expand the R&D (research and development) capability, capture operational efficiencies and focus on new user experiences."

For Yahoo, the bid represents another painful reminder of how missed opportunities and mismanagement combined to open the door for Google to supplant it as the Internet's main gateway, decimating its stock price in the process.

Microsoft is trying to avoid a similar fate at Google's hands as more people access services and computer programs online instead of relying on packaged software applications.

Although Microsoft remains the world's most valuable technology company, its position will become more precarious unless it can cultivate a more loyal Internet audience and generate more online ad revenue to subsidize the free services taken for granted on the Internet.

Microsoft is acutely aware of the upheaval that can be caused by a pivotal shift in technology, having been the biggest beneficiary during the 1980s and 1990s of a transition from mainframe computers to personal computers that knocked IBM Corp. off its pedestal.

"Microsoft has to do this deal. It's a battle that Microsoft needs to win," said AMR Research analyst Jonathan Yarmis.

But there's no guarantee that Yahoo will be willing to sell to Microsoft — or that the deal will win the necessary approvals from antitrust regulators in the United States and Europe if Yahoo capitulates.

Sunnyvale-based Yahoo had little to say Friday beyond a terse statement assuring its shareholders that its board will "carefully and promptly" study the bid.

In a conference call Friday, Microsoft Chief Executive Steve Ballmer indicated he won't take no for an answer after Yahoo rebuffed takeover overtures a year ago.

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"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."

Yahoo will likely face intense pressure to accept, given its steadily sliding profits and a murky 2008 outlook that caused its stock price to drop to a four-year low earlier this week.

Microsoft's $31-per-share offer — $44.6 billion — represented a 62 percent premium to Yahoo's closing price late Thursday, although it's below Yahoo's 52-week high of $34.08 reached less than four months ago. On Friday, the total value of the cash-and-stock deal fell to $41.7 billion, or $28.95 per share, because Microsoft's shares declined on the news.

Yahoo shares soared to a split-adjusted high of $118.75 in 2000 before the dot-com bust. That peak coincidentally also was just before Yahoo gave Google its first big break by hiring it to run its search engine.

Search engines are crucial tools because they have become a central hub in hugely profitable ad networks.

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 magazines. The trend is expected to create an $80 billion online ad market in 2010, up from an estimated $40 billion last year.

After realizing how much money Google was making from search, Yahoo introduced its own technology in 2004, but by then it was too little, too late.

Forrester Research analyst Charlene Li expects Yahoo to resist, predicting the company "will do everything possible to stay independent," even if it means swallowing its pride and rehiring Google to run its search engine and sell ads on its site.

Other analysts still think Yahoo might try to line up a white knight rather than fall into Microsoft's clutches. Analysts mentioned several other potential suitors, including News Corp. and InterActiveCorp.

Dinosaur Securities analyst David Garrity even thinks it's possible that China's search leader, Baidu.com Inc., or Chinese e-commerce conglomerate Alibaba.com Inc. might bid for Yahoo. Alibaba.com is 40 percent owned by Yahoo.

In what most analysts regard as a long shot, there was even some chatter that longtime Microsoft rival Apple Inc. and its CEO, Steve Jobs, might come to Yahoo's rescue.

If push comes to shove, most analysts believe Microsoft will raise its cash-and-stock bid.

Investors appear confident an agreement eventually will be reached. Yahoo shares climbed $9.20, or nearly 48 percent, to $28.38 while Microsoft shares fell $2.15, or 6.6 percent, to $30.45 — a sign that Wall Street is skeptical about whether the acquisition makes sense.

"It's a classic case of a buyer overbidding to blow any potential competitors out of the water," said James Owers, a Georgia State University professor of corporate finance.

Shortly after Microsoft disclosed its intentions, the U.S. Justice Department said it is "interested" in reviewing antitrust issues. European Union officials declined to comment, but analysts said Microsoft probably will face more challenges getting a Yahoo acquisition approved in Europe than the United States.

Microsoft made its offer a few hours after Yahoo's chairman, Terry Semel, stepped down, removing a potential stumbling block. Semel had rejected Microsoft's takeover overtures a year ago while he was still Yahoo's chief executive, according to a letter released Friday.

Yahoo co-founder Jerry Yang replaced Semel as CEO nearly eight months ago while another Yahoo director, Roy Bostock, is now chairman.

Yang, a billionaire who is one of Yahoo's largest shareholders, isn't believed to have warm and fuzzy feelings about Microsoft. He has openly expressed his admiration for Jobs and last year even invited the Apple CEO to Yahoo's headquarters for a pep talk with employees.

Microsoft believes its technological expertise will be a good fit with Yahoo's knack for providing content and services that keep people coming back to its site. Combined, the two companies would reach a U.S. online audience of 142 million compared with 124 million for Google, according to Nielsen Online.

But Yahoo and Microsoft are so far behind Google in the lucrative search market that they still will have a lot of ground to make up even if they joined forces.

Google already controls 62 percent of the worldwide search market, and has been widening its lead, according to the latest data from comScore Media Metrix. By combining, Microsoft and Yahoo would have a 16 percent share of the worldwide search market, the Web traffic tracking company said.

Google shares fell $48.40, or 8.6 percent, to close at $515.90 Friday, but the downturn appeared to be driven more by a disappointing fourth-quarter earnings report than by Microsoft's bid for Yahoo.

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. 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 Johnson hailed Yahoo's strong brand value but did not commit to keeping the name alive.

AP Business Writer Jennifer Malloy in New York and AP Business Writer Jessica Mintz in Seattle contributed to this story.

Copyright © 2008 The Seattle Times Company

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