KEY POINTS:
Microsoft Corp has today made a bid to buy Yahoo Inc for US$44.6 billion, seeking to join forces against Google Inc in what would be the biggest internet deal since the Time Warner- AOL merger.
In its boldest-ever acquisition move, Microsoft sent a letter to Yahoo's board on Thursday night (US time) to offer US$31 per share in cash and stock, a 62 per cent premium over the internet media company's Nasdaq closing stock price that day.
Yahoo would give Microsoft dominance in Web banner ads used by corporate brand advertisers. It also attracts more than 500 million people monthly to sites devoted to news, finance and sports, and Yahoo Mail is the No. 1 consumer email service.
"Microsoft's wanted to do things that could build up its online business dramatically," said Pacific Crest analyst Brendan Barnicle. "This is going to be a big bet for them."
Yahoo said today its board will evaluate the unsolicited offer. Its shares shot up 47.45 per cent to US$27.29, while Microsoft shares, which have a market capitalization of about US$300 billion, fell 6.38 per cent to US$30.52.
Speculation of a tie-up has swirled in the markets for more than a year, as investors looked to Microsoft to team up with Yahoo against an ever more powerful Google, which owns about two-thirds of the global Web search market.
But critics say Microsoft and Yahoo have very different corporate cultures and worry about a clash like the one that marred AOL's US$182 billion purchase of Time Warner Inc in 2001, which is seen as the worst merger in recent history, with many of the promised synergies never materializing.
The perception is that Yahoo, an iconic Silicon Valley company with a free-flowing, fun-loving attitude, may not fit in with the button-up, competitive Microsoft, the world's biggest software maker.
The two companies also have many overlapping businesses -- from instant messaging to email and advertising, as well as news, travel and finance sites -- but are both weak in the Web search market, where Google dominates.
Google has a 77 per cent share of the global Web search market, while Yahoo is second with 16 per cent and Microsoft is a distant third with 3.7 per cent, according to comScore data.
"They have to do it because they've tried everything they can do to fix MSN," said Piper Jaffray analyst Gene Munster.
But he added: "Google is running away with the search market and that's obviously the best part of the market. The likelihood that Google gets caught is slim to none."
TRANSFORMATIVE OR OVERPAID?
Microsoft Chief Executive Steve Ballmer told analysts on a conference call the deal would transform its money-losing internet division, which it sees as critical to growth, into a profitable pillar of its business.
"We have been losing money. Our plan here would be to not lose money in the future," Ballmer said.
Ballmer said Microsoft has had on-and-off talks with Yahoo for 18 months, but was told by management a year ago that the timing was not right -- in an apparent reference to Yahoo's then Chairman and Chief Executive Terry Semel.
Semel was replaced by Yahoo co-founder Jerry Yang as CEO in June and resigned as chairman on Thursday.
"With the Semel roadblock now gone, there is reason to think this (merger) is now likely to happen," said RBC Capital internet analyst Jordan Rohan, noting Yahoo is running out of options in the face of a weakening business climate.
"I think Yahoo is going to say 'Yes' to this offer or some offer," he said. "Neither company by itself really seems to pose an effective threat to Google."
Under the proposal, Yahoo shareholders can choose to get US$31 cash, or 0.9509 of a share of Microsoft common stock. The deal in aggregate must consist of one-half cash and one-half Microsoft common stock, the software maker said.
Some analysts said Microsoft was overpaying for a company that warned earlier this week it faced "head winds" in 2008, forecasting revenue below Wall Street expectations.
"To me, the premium seems exorbitant, for what is a dwindling business. I personally don't see how the synergies of Microsoft-Yahoo is going to take on Google," said Tim Smalls, head of US stock trading at brokerage firm Execution LLC.
Global Equities Research analyst Trip Chowdhry said Yahoo is not worth more than US$20 per share as its only worthwhile properties are Yahoo Mail, Yahoo Answers and Yahoo Finance.
But others said the price is low enough for rival bidders to emerge, noting Yahoo traded at US$34.08 in late October.
"There could be a little more money on the table," said Laura Martin, an analyst at Soleil-Media Metrics. "The company is in play. Yahoo will not be able to stay independent. Other bidders will emerge before this is over."
ANTITRUST CONCERNS
Analysts cited Comcast Corp, Viacom Inc, News Corp and General Electric Co among possible bidders, although they also said few had the balance sheet to compete with Microsoft or were as natural a fit for Yahoo.
Microsoft General Counsel Brad Smith acknowledged other bidders could emerge, but said any attempt by arch-rival Google to acquire Yahoo would face insurmountable antitrust hurdles.
Antitrust experts said regulators would likely take a close look at a Microsoft-Yahoo deal, but as the two are dwarfed by Google, the deal will ultimately likely be approved.
Microsoft said the online advertising market is growing rapidly and expected to reach nearly US$80 billion by 2010 from over US$40 billion in 2007. It paid US$6 billion last year to buy online advertising services firm aQuantive as a bulwark against Google's growing position.
The software company said it identified four areas that would generate at least US$1 billion in annual synergies for the combined entity.
Morgan Stanley and Blackstone LP scooped the prize banking job of advising Microsoft on the deal, according to sources familiar with the matter, while Yahoo is being advised by Goldman Sachs Group Inc.
- REUTERS
