Microsoft offers $44.6 bln for Yahoo; targets 'dominant player'

[dn4911]

By Aude Lagorce
Feb 1, 2008 08:44:00 (ET)

WASHINGTON (MarketWatch) -- Microsoft Corp. on Friday offered to buy search engine operator Yahoo! Inc. for $44.6 billion, in an effort to better compete with online advertising giant Google Inc.

Microsoft (MSFT) said its "compelling" offer of $31 a share, half cash and half stock, represents a 62% premium on the closing price of Yahoo (YHOO) stock Thursday.

In a brief statement, Yahoo said 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."

Yahoo shares jumped 57% to $30 in preopen U.S. trades. Microsoft shares were down 5%, while Google (GOOG) stock dropped 6%.

"This is Microsoft declaring who the enemy is and taking a bold move to address it," said David Mitchell, senior vice president in the technology-research practice of U.K.-based consultancy Ovum.

"Google poses a clear long-term threat to Microsoft's business....But Microsoft and Yahoo together would make a significant competitor who could fight back, "he said.

Google dominates the Internet-search business with a 56.3% market share, according to the latest report by ratings agency Nielsen Online. Yahoo! (17.7%) and Microsoft (13.8%) combined for a market share of 31.5% in December, Nielsen said.

Microsoft has been actively seeking ways to boost its presence in the Internet-search market and pursued an acquisition of Yahoo last year, but Yahoo balked.

The sharp decline in Yahoo's stock - it recently touched its lowest point since October 2003 - made a potential purchase more inviting for Microsoft. Earlier this week, Yahoo posted a sharp drop in fourth-quarter profit and said it would trim its workforce.

What's more, the online-advertising market is expected to grow at a fast pace in the next few years, Microsoft said in its release on the bid. "Today this market is increasingly dominated by one player. Together, Microsoft and Yahoo! can offer a competitive choice."

Microsoft said the combination would create a more "efficient" company with annual savings of $1 billion, driven by research and development critical mass, operational efficiencies and increased value for advertisers.

Yahoo has more than 500 million unique users and over 4 billion daily page views. Its roster of advertisers includes Ameritrade (AMTD), Time Warner Inc.'s (TWX) AOL, Bank of America (BAC) and Hewlett-Packard (HPQ).

In a note to clients published on Thursday, Goldman Sachs analysts stressed that Microsoft has been slow to gain critical mass in the area of online advertising and said there was a compelling case for the company to buy Yahoo to better compete with Google (GOOG).

"Given Yahoo's recent business and stock declines, we believe it's becoming a now or never proposition," the broker said.

It cautioned, however, that the risks of a "culture mismatch" and potential employee attrition would have to be managed carefully.

Ovum's Mitchell, however, said the cultural difference between the two companies should not be overplayed.
"Microsoft has many different divisions and each has it own culture. There's a place for Yahoo in there," he said.

Microsoft said it would offer significant retention packages to Yahoo engineers, key leaders and employees across all disciplines.

The software behemoth expects the deal to get regulatory clearance and to be completed in the second half of 2008.