Microsoft Makes $45 Billion Bid To Buy Yahoo

Microsoft YahooMicrosoft is to bid $31 per share to Yahoo’s board of directors to purchase the company, a deal potentially worth $45 billion. Below, more details, some history, and analysis. We’ll also keep updating this story, and we’ll have a separate post linked from this when the conference call starts.

The Proposal

Microsoft has proposed to Yahoo’s Board Of Directors that Microsoft acquire all Yahoo shares for $31, which is currently estimated to be worth $44.6 billion. Yahoo shareholders would get either cash or Microsoft shares (0.9509 of shares per 1 Yahoo share), though the entire deal couldn’t involve more than half payment overall in cash ($22.3 billion). The price is said by Microsoft to be 62 percent higher than what Yahoo shares went for as of the close of trading yesterday. Note that former Yahoo CEO Terry Semel has just stepped down as chairman of the board, with existing board member Roy Bostock now stepping up.

UPDATE: Yahoo has posted a short response:

Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company, today said that it has received an unsolicited proposal from Microsoft to acquire the Company. The Company said that its Board of Directors 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.

UPDATE: Call now has happened, rough live blog notes here.

The Spin

Microsoft execs, from the company press release, about the move:

"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," said Steve Ballmer, chief executive officer of Microsoft. "We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners." 

"Our lives, our businesses, and even our society have been progressively transformed by the Web, and Yahoo! has played a pioneering role by building compelling, high-scale services and infrastructure," said Ray Ozzie, chief software architect at Microsoft. "The combination of these two great teams would enable us to jointly deliver a broad range of new experiences to our customers that neither of us would have achieved on our own."

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.

"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." 

Why Do It?

The Microsoft summary, from the release:

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.

I’ll add longer non-Microsoft analysis as I continue to update this story, along with some references. But the short story is this: Search is important, and Microsoft has failed to build, much less maintain search share while Yahoo has held steady against Google. Some fast backup links on this:

How To Do It?

Exactly how Yahoo would be merged isn’t clear. The release says simply:

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.

From the letter to Yahoo’s board, Microsoft adds:

  • Scale economics:  This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale.  This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers.  Additionally, the combination allows us to consolidate capital spending.
     
  • Expanded R&D capacity:  The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform.  Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities.  Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.
     
  • Operational efficiencies:  Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity. 
     
  • Emerging user experiences:  Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced. 

History

The idea of Yahoo and Microsoft getting together has been out there for years, often scoffed at, but making sense in Yahoo’s large lead in search against Microsoft and that company’s failure to quickly gain on Google, much less Yahoo.

Back in May 2006, then Yahoo CEO Terry Semel now famously quipped about Microsoft having "no chance in search:"

In a breakfast interview with New Yorker writer Ken Auletta, Mr. Semel, a former film industry executive, swatted down the idea that Yahoo ever talked about an outright sale to Microsoft. Instead, he said that they tossed around the notion of Microsoft buying a stake in Yahoo’s search business — a transaction that he compared to an amputation.

“Microsoft taking over Yahoo — that conversation has never come up,” Mr. Semel said. “[We discussed] search, and Microsoft co-owning some of our search. I will not sell a piece of search. It is like selling your right arm while keeping your left — it does not make any sense.”

Indeed, Mr. Semel’s less-than-flattering comments about Microsoft made an alliance between the two companies seem even more unlikely. “My impartial advice to Microsoft is that you have no chance,” he said. “The search business has been formed.” He also suggested that Yahoo employees might chafe under Microsoft’s control.

If Microsoft now actually buys Yahoo, some might say they had the last laugh. But then again, it is to some degree an acknowledgment that Microsoft did need Yahoo, after all.

In 2007, more news of talks came out, but these went nowhere (see here for a Ballmer reaction). But the letter to Yahoo from Microsoft suggests that Yahoo doesn’t have the luxury of sitting back:

In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that "now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction."  According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the "potential upside" if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment.  A year has gone by, and the competitive situation has not improved. 

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.

What’s Next

What’s going to happen? It’s not clear that Yahoo will necessarily say yes. Suddenly, the offer makes the company look much more valuable. In addition, AOL, IAC, and potentially Google could make offers. Ironically, if Google were to do so, no doubt a huge anti-trust uproar would emerge. But Microsoft, with such a smaller share of search and online advertising, is likely to escape such serious attention.

As said, we’ll be updating throughout the day and cross-linking to a separate post when the planned conference call happens at 8:30am Eastern time.

Postscript: For more on the Microsoft bid for Yahoo, also see our fresh coverage:

Also see discussion from across the web on Blogrunner and Techmeme.

Related Topics: Channel: Industry | Microsoft: Business Issues | Yahoo: Business Issues

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About The Author: is a Founding Editor of Search Engine Land. He’s a widely cited authority on search engines and search marketing issues who has covered the space since 1996. Danny also serves as Chief Content Officer for Third Door Media, which publishes Search Engine Land and produces the SMX: Search Marketing Expo conference series. He has a personal blog called Daggle (and keeps his disclosures page there). He can be found on Facebook, Google + and microblogs on Twitter as @dannysullivan.

Connect with the author via: Email | Twitter | Google+ | LinkedIn



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