Yahoo Sale Could Be Bad for Minnows
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Microsoftâs proposed mega-bid for Yahoo is based on its own particular corporate needs and may not be a harbinger of rampant deal-making in Silicon Valley.
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Yahoo Inc's  board  believes Microsoft Corp's  unsolicited bid of $44.6  billion to acquire Yahoo "massively undervalues" the company  and directors are set to reject the offer, the Wall Street  Journal reported on Saturday, citing an unnamed source.
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In a letter to Yahoo&#39;s board, Microsoft CEO Steve Ballmer&#160;offered to acquire the company&#160;for a per-share price of $31 in cash or 0.9509 of a share of Microsoft common stock -- a 62 percent premium above the Jan. 31, closing price of Yahoo -- and cited the broad range of ways in which the companies might work together to create a more effective competitor in the online marketplace. Below is the text of the letter that Microsoft sent to Yahoo&#39;s Board of Directors:January 31, 2008Board of DirectorsYahoo! Inc.701 First AvenueSunnyvale, CA 94089Attention: Roy Bostock, ChairmanAttention: Jerry Yang, Chief Executive OfficerDear Members of the Board:I am writing on behalf of the Board of Directors of Microsoft to make a proposal for a business combination of Microsoft and Yahoo!. Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft&#39;s closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock. Microsoft would provide each Yahoo! shareholder with the ability to choose whether to receive the consideration in cash or Microsoft common stock, subject to pro-ration so that in the aggregate one-half of the Yahoo! common shares will be exchanged for shares of Microsoft common stock and one-half of the Yahoo! common shares will be converted into the right to receive cash. Our proposal is not subject to any financing condition.Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008. The implied premium for the operating assets of the company clearly is considerably greater when adjusted for the minority, non-controlled assets and cash. By whatever financial measure you use - EBITDA, free cash flow, operating cash flow, net income, or analyst target prices - this proposal represents a compelling value realization event for your shareholders.We believe that Microsoft common stock represents a very attractive investment opportunity for Yahoo!&#39;s shareholders. Microsoft has generated revenue growth of 15%, earnings growth of 26%, and a return on equity of 35% on average for the last three years. Microsoft&#39;s share price has generated shareholder returns of 8% during the last one year period and 28% during the last three year period, significantly outperforming the S&amp;P 500. It is our view that Microsoft has significant potential upside given the continued solid growth in our core businesses, the recent launch of Windows Vista, and other strategic initiatives.Microsoft&#39;s consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers. In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that &quot;now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.&quot; According to that letter, the principal reason for this view was the Yahoo! Board&#39;s confidence in the &quot;potential upside&quot; 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.While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. 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 for consumers, advertisers, and publishers. Synergies of this combination fall into four areas: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&amp;D capacity: The combined talent of our engineering resources can be focused on R&amp;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.We would value the opportunity to further discuss with you how to optimize the integration of our respective businesses to create a leading global technology company with exceptional display and search advertising capabilities. You should also be aware that we intend to offer significant retention packages to your engineers, key leaders and employees across all disciplines.We have dedicated considerable time and resources to an analysis of a potential transaction and are confident that the combination will receive all necessary regulatory approvals. We look forward to discussing this with you, and both our internal legal team and outside counsel are available to meet with your counsel at their earliest convenience.Our proposal is subject to the negotiation of a definitive merger agreement and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of Microsoft common stock, we would provide Yahoo! the opportunity to conduct appropriate limited due diligence with respect to Microsoft. We are prepared to deliver a draft merger agreement to you and begin discussions immediately.In light of the significance of this proposal to your shareholders and ours, as well as the potential for selective disclosures, our intention is to publicly release the text of this letter tomorrow morning.Due to the importance of these discussions and the value represented by our proposal, we expect the Yahoo! Board to engage in a full review of our proposal. My leadership team and I would be happy to make ourselves available to meet with you and your Board at your earliest convenience. Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!&#39;s shareholders are provided with the opportunity to realize the value inherent in our proposal.We believe this proposal represents a unique opportunity to create significant value for Yahoo!&#39;s shareholders and employees, and the combined company will be better positioned to provide an enhanced value proposition to users and advertisers. We hope that you and your Board share our enthusiasm, and we look forward to a prompt and favorable reply.Sincerely yours,/s/ Steven A. BallmerSteven A. BallmerChief Executive OfficerMicrosoft Corporation
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In a bid to halt Google's growing dominance online, Microsoft has offered to buy struggling Internet giant Yahoo for $44.6 billion, an acquisition that would unite the world's most influential software company with the Web's most-trafficked site.
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Most of the talk about Microsoft's hostile offer for Yahoo has focused on whether the deal could tip the scales in the battle for Internet dominance. Today, I'd like to steer the conversation to something a little more basic that almost everyone has overlooked: the numbers.
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Microsoft may mess things up for Flickr, but Yahoo hasn't been so great either.
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Microsoft's bid for Yahoo could provide more choice for big online advertisers living in a Google-centric universe but could hurt small- and mid-sized Internet publishers by taking away one of their options for selling ads on their Web sites.
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Microsoft&#39;s $44.6 billion offer to purchase Yahoo&#160;is a dramatic statement from a company that delayed acknowledging the importance of emerging Web business models for so long, it faced becoming an also-ran in the Web 2.0 economy.But the cultural implications of the move are so tricky that the deal could end up backfiring for both vendors if Microsoft doesn&#39;t take care to learn from its past and use Yahoo to transform its business and&#160;not just help bolster its unproven efforts in online advertising and hosted services.The unprecedented deal, which would put a sizable dent in Microsoft&#39;s wallet, would be the largest purchase ever for the company. If Microsoft is willing to spend that much money, it also has to be willing to change some old ways of thinking to make the most out of the investment, analysts say.To achieve this, analysts caution Microsoft to be careful not to view Yahoo as a one-trick pony, taken onboard only for its user base and infrastructure to bolster Microsoft&#39;s online advertising interests against Google. While this is certainly the primary reason for the deal, to make the most of it, Microsoft has to not only respect the strength of Yahoo&#39;s brand but also be willing to let go of some of its own traditional proprietary interests -- not just on the product side but in its culture as well.Microsoft has never been one to let go of its vision or proprietary interests too easily; when acquiring companies, it usually subsumes the products and services and brands them as its own.While this has worked in the past because Microsoft traditionally has shied away from acquiring big-name or big-ticket items --&#160;last year&#39;s $6 billion aQuantive deal&#160;was a notable exception -- it&#39;s not as simple to do this with a company like Yahoo, analysts said.In the areas of online search and particular services and as an online destination for users, Yahoo is a stronger brand than Microsoft. Microsoft must recognize this and be willing to give up some of its interest in new content and services branded, respectively, under MSN and Windows Live to make the deal successful, said Ned May, director and lead analyst for market research firm Outsell.&quot;The big question is, will Microsoft take this and recognize it for being a stronger property and migrate its efforts there, or will it try to push its own efforts out through Yahoo?&quot; he asked. &quot;Historically, there&#39;s no precedent for it to do anything but use [an acquired company] to get Microsoft&#39;s message out.&quot;Though Microsoft and Yahoo are different types of companies and the union itself makes much more sense, Ron Schmelzer, analyst and managing partner with Zapthink, likened the deal to Time Warner-AOL, in which AOL&#39;s brand was damaged, not enhanced, after all was said and done.But investing as much as the gross domestic product of some countries in one company could inspire Microsoft to &quot;change its stripes&quot; and rethink its own interests, he said.To make the deal a true success, Microsoft also has to prove that it can let go of its entrenched Windows OS and desktop software culture, which had been the anchor keeping Microsoft from moving more quickly against Google and Yahoo in online advertising and services in the first place, Schmelzer said.&quot;The application itself is moving away from the thing that sits captive on your desktop to the thing that&#39;s distributed on the Internet,&quot; he said. &quot;Microsoft has to rid itself of its &#39;80s and &#39;90s perspective -- which was great in the &#39;80s and &#39;90s, but now 80 percent of the value of the computer is not in the computer itself.&quot;Microsoft had been moving in this direction before Friday&#39;s news, but it has been burdened by its need to keep the customers of two of its biggest consumer products -- Windows and Office -- happy, as well as its enormous portfolio of enterprise and business customers. Instead of moving full bore into the Web, Microsoft had adopted a &quot;software plus services&quot; strategy as a nod to its software legacy and inability to move fully to a more services-oriented strategy because of it.Still, some think an entire cultural shift isn&#39;t necessary for Microsoft to make the most out of the deal. David Mitchell Smith, vice president and fellow at Gartner, said Microsoft can leverage Yahoo successfully without changing its usual way of doing things, by keeping the brand and merging the best parts of Yahoo&#39;s Internet business, such as its online content, advertising and search, with its online services efforts.&quot;I would expect to see the Yahoo brand come out of this very, very strong,&quot; he said. In particular, Microsoft has been making moves to drive more video and other multimedia content online through MSN, and that is one area where the company could give up its own identity in favor of Yahoo&#39;s, Smith said.Andrew Brust, chief, new technology for consulting firm twentysix New York, said that the combination of Microsoft&#39;s existing Web technology and the Yahoo brand would be &quot;nicely complementary,&quot; though he acknowledged the risks of such a union. Even so, &quot;risk aversion is not a good Internet strategy,&quot; Brust said. Taking a risk in this area as well as bringing &quot;some truly Internet-focused mindset into the corporate culture&quot; may be just what Microsoft needs.Others likened the deal to another risky one, HP-Compaq, which many feared would be a disaster because of product overlap and cultural differences. That deal eventually proved successful.However, it&#39;s important to keep in mind how much more of a role that culture and the cool factor plays on the Internet than it does in the world of traditional computer hardware, warned Outsell&#39;s May. He said Yahoo users may be put off by the notion of Microsoft as their new daddy and see Google as the lesser of two evils, which would defeat the notion of the Microsoft-Yahoo union in the first place.
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Yahoo has been trying to buy Facebook for a good while now, with the most recent rumored amount being for $1.62 billion. TechCrunch has obtained documents on Yahoo&#8217;s valuation of Facebook, and expected advertising revenue growth over the next 10 years. From TechCrunch: Leaked documents in our possession state that an early offer was $37.5 million for [...]
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Microsoft plans to intensify its pursuit of Yahoo this week when it authorizes a proxy fight to oust Yahoo&#39;s board, meaning the 19-day old acquisition attempt will soon turn a darker shade of ugly, according to The New York Times.The proxy fight will cost Microsoft between $20 million and $30 million, much less than having to significantly up its offer for Yahoo, The Times reported Tuesday morning, quoting anonymous sources.The aggressive move would be consistent with Microsoft&#39;s statements hinting that it&#39;s willing to acquire Yahoo via hostile means if necessary.&#160;Yahoo&#39;s board rejected unanimously Microsoft&#39;s offer, calling it too low.Yahoo declined to comment about The Times&#39; article. Microsoft didn&#39;t immediately reply to requests for comment.On Feb. 1, Microsoft offered to pay $31 per share for half of Yahoo&#39;s outstanding shares in cash -- about $22.3 billion -- and 0.9509 of a Microsoft share for the other half. Microsoft&#39;s half-cash/half-stock offer to Yahoo was valued at about $44.6 billion at the time it was made; Yahoo&#39;s share price was $19.18 at the time.However, the bid&#39;s value has dropped to about $41 billion as the price of Microsoft&#39;s stock has fallen from $32.60 at the time the offer was made. It was trading at $28.77 on Tuesday morning. At the same time, Yahoo&#39;s stock has surged, erasing the bid&#39;s original premium. It was trading at $29.32 on Tuesday morning.In the proxy fight, Microsoft would hire a proxy solicitor to urge Yahoo investors to kick out board directors, The Times reported, adding that all Yahoo directors are up for nomination this year.After investing heavily in recent years in its Internet business and failing to achieve its desired goals, Microsoft is now convinced that it must acquire Yahoo in order to compete against common rival Google, especially in search advertising, the largest online advertising market pie, and one that Google dominates.As of the end of 2007&#39;s third quarter, Google had almost 25 percent of the U.S. Internet advertising market, up from almost 21 percent in 2006&#39;s third quarter, according to IDC. Meanwhile, Yahoo&#39;s share during this period dropped to 11.3 percent from 12.3 percent, while Microsoft&#39;s declined to 5.2 percent from 5.8 percent, according to IDC.In search usage, Google held a commanding 62.4 percent of queries worldwide, followed by Yahoo in a very distant second place with 12.8 percent, according to comScore. Microsoft ranked fourth with 2.9 percent, after Baidu (5.2 percent).Unquestionably, Yahoo would be a major win for Microsoft in the display ad market. In November, Yahoo ranked first in the U.S. in display ad impressions with a 19 percent share, while Microsoft came in third with 6.7 percent, after News Corp.&#39;s Fox Interactive (16.3 percent), according to comScore. Google took seventh place with 1 percent.However, skeptics question whether acquiring Yahoo will yield the expected benefits, considering the complexity of integrating the two businesses, cultures and technology platforms and the fact that Yahoo has had severe internal problems that have stumped its most seasoned executives. In addition, some aren&#39;t sure that a unified Microsoft/Yahoo will have a better chance to compete against Google.Yahoo co-founder and CEO Jerry Yang, who is also on the board of directors, has been urgently looking for and considering alternatives to a Microsoft acquisition soon after Ballmer and company made their bid.Reports -- all attributed to anonymous sources in various media outlets -- have emerged in the past two weeks that Yang has held conversations with Google, AOL and News Corp., exploring various deals that would allow him to reject Microsoft&#39;s offer.The key is that the shareholder value created by a competing deal would have to at least match the value of Microsoft&#39;s deal. Otherwise, Yahoo would make itself liable to shareholder lawsuits that alleged the board had failed to perform its fiduciary duty.So far, as experts have analyzed the potential value to Yahoo of outsourcing its search advertising to Google, merging with AOL or selling a 20 percent stake to News Corp. in exchange for MySpace, the consensus has been that none of those scenarios comes close to matching Microsoft&#39;s offer.
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If you search for Yahoo Microsoft, this page is the second hit. I like that of course. It's generating a fair amount of flow, since the combination of Yahoo and Microsoft is a pretty hot topic. Keeping the topic going, I think it's pretty amazing that Microsoft wants to buy Yahoo, but then again, which of all their web efforts has captured our imagination? At least Yahoo has Flickr, and when they try something new, we all try it with them (often with not the greatest results). The rambling continues... If Yahoo is into poison pills, try this one out.  Reserve 5 percent of Yahoo's common stock for blogger options. Put us to work to find new businesses for Yahoo, ones that are relevant to our world. When we find them, reward the bloggers with a significant upside stake in Yahoo's future, not the airy-fairy kind, but real stock that we can trade. Handled properly, it could raise shareholder value by much more than 5 percent. Just the kind of deal they pay you to do, oh Yahoo gods and board members.  Of course it'll never happen. It's an idea like the one I keep proposing for newspapers -- that they hire their public editors from the public, independent bloggers with no journalism experience, with no undue reverence for the institutions so revered by journos. They're going away, just like Yahoo is (sad but true). Now what will rise in their place? Imho, something that's home grown, with the integrity of the people, in our interest. The more they invite the public in, the more clued in they will be when we figure out where we want to go with news on the web. It's why I'm excited about the Obama campaign and why I keep giving to it (I'm up to $400 now). I'm excited because so many other people are excited.  I like his idea about tuition for public service for college students. It's so simple. People want to be involved, they want to use their energy and creativity to solve problems. In the 20th century we were couch potatoes. In the 21st we do it for ourselves.  The first tech company that fully embraces this, not just in the form of User Generated Content (what an insult) but by giving us power (that comes from stock) will rule the world. If Y! had the guts, it won't be long before they're making tender offers to buy out Ballmer.  BTW, I think I understand why Ballmer wants Yahoo! When Yahoo engineers wake up they program stuff like Yahoo Live, which is pretty cool and runs on the web, and while it steals ideas from smaller companies, it adds some pretty cool stuff of its own. When Microsoft engineers wake up they program stuff like Vista, a multi-year, multi-billion dollar waste of money, time and customer goodwill. They can't do another Vista without wrecking the franchise. Now the question is -- where do they go for growth? That's what Yahoo is for.
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Yahoo&#39;s rejection of Microsoft&#39;s acquisition bid&#160;is likely a negotiating strategy to elicit a higher offer and shouldn&#39;t be seen as an attempt to resist a deal at all costs, according to analysts.Neither Microsoft nor Yahoo has many options to improve their position in online services and advertising, and combining forces is their best bet against common rival Google, analysts said.&quot;It&#39;s part of a larger negotiation that&#39;s occurring. Clearly, Yahoo should be and is seeking a higher bid, and this is part of that process,&quot; said Clayton Moran, a financial analyst with Stanford Group.Yahoo is unlikely to find a company willing to bid as much as Microsoft for it, while Microsoft will not be able to attain its Internet goals by acquiring a company other than Yahoo. &quot;While they need to negotiate and go through the process, at the end of the day this deal will happen,&quot; Moran said.On Monday, Yahoo rejected Microsoft&#39;s bid, saying it undervalues the company. Microsoft offered to pay $31 for half of Yahoo&#39;s outstanding shares and 0.9509 of a Microsoft share for the other half. At the time of the offer, Microsoft&#39;s stock stood at $32.60 and the bid was valued at $44.6 billion, a 62 percent premium over Yahoo&#39;s stock price at the time. However, the bid&#39;s value has dropped with Microsoft&#39;s sliding stock price, which at press time was $28.10. At the same time, Yahoo&#39;s stock price has risen from a close of $19.18 on the day before the bid to $29.75 at press time.Moran predicted that Microsoft will adjust its offer so that it ends up at $35 per share, probably increasing the fixed cash portion and reducing the variable stock portion so that value is less vulnerable to Microsoft stock fluctuations. A $35-per-share offer would be a midpoint between the original bid and the $40 per share Yahoo is reportedly seeking.&quot;We continue to view a Yahoo sale to Microsoft as the most likely outcome,&quot; Citigroup financial analysts wrote in a note published Sunday after press reports over the weekend that Yahoo would reject the Microsoft bid. The rejection isn&#39;t surprising but rather is consistent with Yahoo&#39;s board job to &quot;extract maximum value&quot; for shareholders, the Citigroup analysts wrote.Yahoo has reportedly held talks with Google and AOL to explore alternatives to a Microsoft acquisition. One scenario being floated would be for Yahoo to outsource its search advertising business to Google, while another, reported Monday by The Times of London, has Yahoo and Time Warner&#39;s AOL discussing a possible merger.However, neither option would match the potential benefits of an acquisition by Microsoft, Moran said. &quot;A combined Yahoo-AOL wouldn&#39;t be particularly strong, and Yahoo&#39;s stock wouldn&#39;t react favorably to that deal,&quot; Moran said. A search partnership with Google would boost Yahoo&#39;s revenue, but it wouldn&#39;t address larger problems within the company, he said.For Moran, if Yahoo has approached AOL, it has done so probably to send a message to Microsoft that it has other options and that Microsoft has to sweeten its offer. Meanwhile, Google&#39;s intervention is probably directed at complicating and lengthening the negotiation process between Microsoft and Yahoo and thus delaying the formation of a stronger rival, Moran said.While merging with AOL is unlikely to give Yahoo the boost it needs, such a deal would probably be more palatable to Yahoo&#39;s management because Yahoo would be the strongest party in the fusion, according to industry analyst Greg Sterling of Sterling Market Intelligence.&quot;Yahoo sees its own demise in a Microsoft acquisition. My sense is that Yahoo&#39;s management believes that Yahoo&#39;s soul wouldn&#39;t survive as part of Microsoft,&quot; Sterling said.At this point, the situation is very complicated for both Microsoft and Yahoo. If Yahoo is intent on fending off Microsoft&#39;s advances at all costs, Microsoft could opt to walk away empty-handed and face a public embarrassment, or attempt a hostile takeover, which could alienate and scare away Yahoo employees it would want to retain, Sterling said.At the same time, Yahoo can&#39;t simply wave away a generous Microsoft offer if it doesn&#39;t have an alternative to it, Sterling said. &quot;There is a great deal at stake for both sides, and it&#39;s very complicated,&quot; he said.Microsoft declined to comment about Yahoo&#39;s rejection. AOL didn&#39;t immediately reply to a request for comment about its reported merger talks with Yahoo.
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Microsoft's offer to buy Yahoo for $44.6 billion is adding more fuel to the merger craze fire. But such mega-mergers often have less than stellar results, as four examples show.
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Yahoo Inc. is set to reject Microsoft Corp.'s offer, initially worth $44.6 billion, as undervaluing the business, a source familiar with the situation said on Saturday.
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A chorus of Wall Street analysts are urging Yahoo to take the deal, now that it's clear no other buyers are really emerging. But they're also saying it's time for Microsoft to raise its original offer for Yahoo in order to make it happen.
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An analyst runs through the numbers and shows just how far Yahoo has slumped. Will its poor stock performance make it a takeover target?
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No other buyer will be willing to pay more for Yahoo. Since Yahooâs management will not be able to justify turning down that sort of premium, Microsoft is likely to win the prize.