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Microsoft’s Yahoo bid aims at Web

Times Staff Writers

Acknowledging it can’t beat Internet juggernaut Google Inc. on its own, Microsoft Corp. on Friday lashed its online fortunes to another Web also-ran with an unsolicited $44.6-billion bid for Yahoo Inc.

Microsoft and Yahoo, two of the world’s most powerful technology companies, have each spent billions of dollars over the last half-decade trying to catch up to Google in the lucrative search-engine advertising business but still find themselves as far behind as ever.

When Yahoo’s stock plunged to a four-year low this week, Microsoft pounced. It had been rebuffed by Yahoo before, but Friday’s $31-a-share offer amounted to 62% more than the company’s market value, and this time Microsoft publicly announced its intentions. Yahoo said it would consider the offer.

If Yahoo shareholders say yes and the deal survives the heavy scrutiny expected from U.S. and European regulators, it would represent the largest merger of two technology companies to date. The pact would combine the world’s top software maker with an Internet titan struggling to find its way.

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A merger would probably yield few major changes for Web users, analysts said, but could keep Google’s growing sway over the $40-billion online advertising market in check by creating a powerful alternative for marketers.

“With the combined reach of these two properties, you’ve got a really tantalizing prospect for the online advertising community,” said Ian Schafer, chief executive of online marketing agency Deep Focus.

Google would continue to dominate Web search, where Nielsen Online said it had 56% of the market. But Microsoft and Yahoo would control the majority of online banners and other display ads, plus compete well with Google in the developing markets for video and mobile ads, analysts said.

“The combined entity would be visited by 86% of U.S. Internet users, account for 15% of all time spent online, and represent 59% of online display ad impressions,” Nielsen Vice President Ken Cassar said.

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Integrating the two companies, however, could be a huge challenge.

Microsoft, based in Redmond, Wash., makes the operating systems that run more than 90% of the planet’s personal computers. It’s awash in cash but loses money in its online ventures as it invests heavily in its search engine and ad-delivery technologies.

Yahoo’s websites were the world’s third-most-visited in December, behind Google and Microsoft’s, according to Nielsen. The Sunnyvale, Calif., company has continued to surrender online advertising market share to Google, which earned more than six times as much money in 2007 thanks to the text ads it delivers with search-engine results.

After resurrecting the company after the dot-com crash early this decade, Terry Semel stepped down as Yahoo’s chief executive in June under pressure from shareholders. Co-founder Jerry Yang replaced him but so far has made little visible progress competitively. Semel resigned as chairman on Thursday.

Microsoft had proposed joining forces in a number of ways during the last few years, only to be turned down by Yang and other top executives. This week, after Microsoft reported strong quarterly earnings and Yahoo gave a weak forecast, the software giant’s chief executive, Steve Ballmer, acted.

Ballmer called Yang and said he was ready to go public with a generous offer that could force the hand of Yahoo’s board of directors. With Yang still noncommittal, Microsoft made good on the threat Friday.

“Only in the last couple of weeks has it gotten patently evident that it’s the right thing to do,” said a veteran of both companies who requested anonymity because he still worked with them. “The perception is, it’s such an extraordinary alignment of opportunity that it would be egregious not to make this play. It’s the best possible counter to Google’s continued growth.”

Analysts said the large premium made it likely that Microsoft would close the deal unless Yahoo found another suitor. Rupert Murdoch’s News Corp., which last year proposed swapping its MySpace social-networking site for a 25% stake in Yahoo, is likely to remain on the sidelines of the costly bidding, a person who spoke with executives there said.

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Analysts said Yahoo’s only alternative might be to try outsourcing its search-advertising business to Google, essentially turning to its prime competitor to fend off Microsoft.

Investors expecting the half-cash, half-stock deal to be completed bid Yahoo stock up $9.20 to $28.38, while Microsoft slipped $2.15 to $30.45. Executives said Microsoft’s earnings would be depressed by such an acquisition until the second full fiscal year after it closed.

“The result will be an incredibly efficient and competitive offering for consumers, for advertisers and for publishers,” Ballmer said on a conference call with analysts.

Google shares fell $48.40 to $515.90, a day after its fourth-quarter profit and revenue fell short of analysts’ expectations. The company declined to comment on the proposed merger.

Yahoo had declined to enter into acquisition talks as recently as February of last year, saying it had a strategy to turn things around, according to the offer letter Microsoft made public Friday. “A year has gone by, and the competitive situation has not improved,” Ballmer wrote to Yahoo’s board.

After taking over in June, Yang said he would take 100 days to review the state of the company. Seven months later, shareholders said they had not seen any substantial changes.

“Investors lost faith in the company,” said analyst Anthony Valencia of TCW Group in Los Angeles. “They waited and waited.”

More than seven times larger than its $6-billion acquisition of Web advertising specialist AQuantive, Microsoft’s Yahoo bid is tantamount to a dramatic admission that the company needs help making a run at Google as the world uses the Web for more daily tasks.

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“The old Microsoft strategy of pouring money in until it works wasn’t going to do it,” analyst Charles DiBona of Sanford C. Bernstein said. “You have to give them some credit for changing gears.”

Microsoft executives said that combining research and development efforts could produce better ad targeting based on consumer behavior. And Hollywood studios would be more willing to cut deals with a company that reaches a broader audience.

Ballmer acknowledged the power of the Yahoo brand, which has earned consumer trust while Microsoft labels such as Windows Live Search have left people scratching their heads.

“Microsoft can’t try to brand it all Microsoft,” Citigroup analyst Brent Thill said.

Thousands of employees at each company labor on competing products in areas such as e-mail, search, portals, ad services, news and maps. Microsoft said it would save $1 billion a year by joining forces. Staffers said they expected job cuts at both firms.

Yahoo has had a series of focused partnerships with Microsoft -- at times delivering ads and providing search technology for the MSN portal. Nevertheless, opposition to all things Microsoft has motivated the troops there.

“There’s certainly anti-Microsoft sentiment,” one Yahoo employee said on condition of anonymity. “People would be happy to have a counteroffer.”

Hostile takeovers are rare in the software industry because the workforce is often the most-prized asset. Microsoft executives said they would offer incentive packages to retain top talent.

Although the marriage won’t be easy, Microsoft earns so much money from its software businesses that it could recover even from a bungled integration of Yahoo’s Web properties, Pacific Crest Securities analyst Brendan Barnicle said. “They can get a lot of this stuff wrong and you’ll never know,” he said.

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joseph.menn@latimes.com

jessica.guynn@latimes.com

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Times staff writer Alana Semuels contributed to this report.


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