The bid represented a 62% premium above the closing price of Yahoo common stock of $19.18 on January 31, 2008. The news had an immediate impact, jolting Yahoo’s share price up 59% in pre-market trading on February 1. If the deal goes ahead, the combined force of Microsoft and Yahoo could create a strong opponent to Google’s commanding dominance of the search market.
We believe that Microsoft common stock represents a very attractive investment opportunity for Yahoo’s shareholders, said Microsoft CEO Steve Ballmer in a letter to Yahoo’s board on Thursday 31 January.
The letter referred to the fact that the two companies had previously talked about a partnership or merger a year ago, but that Yahoo had rejected all overtures. It was clear from the tone of the letter that Microsoft would consider a hostile takeover.
Depending on the nature of your response, Microsoft 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, said Ballmer.
Former Yahoo CEO Terry Semel who had rebuffed Microsoft’s overture last year, on Thursday resigned as a non-executive chairman from the Yahoo board.
In the letter, Microsoft outlined how a combined Yahoo/Microsoft force would create a strong pool of engineering talent to push through new innovation, particularly in the expanding areas of video and mobile. It said a merger would create greater operational efficiencies and economies of scale to exploit the expected explosion in online advertising, which Microsoft anticipates will hit $80bn by 2010.
Yahoo has responded to the proposal by saying it would evaluate the offer carefully and promptly.
Although still a major player in the internet search stakes, pulling in more traffic than any other web site, Yahoo’s fortunes have waned in comparison with rival Google. Buying Yahoo would propel Microsoft from a distant third position in the market to become a formidable threat to Google.
Google was not mentioned by name, but was obliquely referred to in Microsoft’s letter. Today, the market is increasingly dominated by one player, who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo can offer a credible alternative, it said.
Sarah Burnett, senior research analyst at the Butler Group said that this is a significant deal for Microsoft. I believe the two of them couldn’t catch up with Google, but joining up gives them an opportunity to do that. Yahoo will give Microsoft a presence that it doesn’t have with MSN, she said.
The move comes on the back of Microsoft’s acquisition of enterprise search firm Fast in early January. Yahoo adds the consumer search piece of the jigsaw to secure Microsoft’s hold on the search market.
But Burnett said the long-term ramifications of the deal stretch far wider than advertising revenue and search. She said gaining Yahoo gives Microsoft a strong and cool (the Redmond giant is many things, but rarely cool) online brand that will attract consumers. Significantly, it will give it a stronger platform to push forward its online, on-demand product suites such as Office Live.
Microsoft wants to preserve its dominance of personal productivity tools, but the way we work is changing and people increasingly will want software on-demand, said Burnett.
Fitting in with this vision of new ways of working, the tie-up would also give Microsoft the leverage to take advantage of new areas such as mobile and video search.
It’s extremely good for Microsoft if the deal gets accepted and goes through, but it depends how they do it, whether they can retain Yahoo’s cool image, and if the organizations can work together, said Burnett.
