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Feb. 2, 2008

Breaking up a rumor that has been going on for many months, Microsoft has officially announced that it wants to acquire Yahoo for about $44.6 billion in cash and stock.

The transaction is expected to make Yahoo better compete with Google in the market for online advertising.

In a letter to Yahoo's board of directors late yesterday, CEO Steve Ballmer made the offer, telling the board that he would officially release the letter Friday morning.

In February of last year, it was Yahoo's board that first approached Microsoft, Ballmer said.

In a statement, Yahoo said its board will carefully evaluate Microsoft's proposal, which it described as unsolicited.

On average, Microsoft expects the market for online advertising to almost double in size in 2011, from $40 billion last year to over $80 billion in two years from now. A merger will allow it to realize economies of scale and reduce capital costs as it addresses this market, it said.

On a conference call Friday, Ballmer called a combination of Microsoft and Yahoo a more "credible" alternative to Google in the online advertising and services market. "By combining the assets of Microsoft and Yahoo we can offer a more competitive choice for consumers, advertisers and publishers," Ballmer said.

Ray Ozzie, chief software architect at Microsoft said in a statement "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 two companies will work hard together to develop the merger plan, Microsoft said. It intends to pay key Yahoo engineers and other staff to stay following the merger.

Microsoft expects to cut costs by $1 billion a year by realizing synergies with Yahoo in four areas:

Microsoft's offer represents nearly a 62 percent premium over Yahoo's closing price on Jan. 31.

The software giant expects to receive all necessary approvals in the second half of 2008. Despite the potential for short-term gain, Yahoo, in its statement, said its goal will be to maximize long-term value for shareholders.

At this premium, even if Yahoo's top managers were opposed to the acquisition, Yahoo's board of directors has an obligation to consider the offer on behalf of shareholders, said industry analyst Greg Sterling from Sterling Market Intelligence.

A joint Microsoft-Yahoo would from day one be a formidable player in display advertising and mobile Internet services, he said. Ever since the first rumblings about a possible acquisition of Yahoo by Microsoft in Feb. 2007, things have gone downhill for Yahoo, including several reorganizations and many management shakeups, so the deal appears more plausible today, Sterling said.

At the same time, despite considerable investments, Microsoft hasn't made as much progress in search engine advertising and usage as it had hoped, he said. Meanwhile, now that Microsoft has made its move, it wouldn't be surprising to see other suitors jump in and make competing bids for Yahoo, Sterling said.

Unless Microsoft were to run Yahoo like an independent unit, there will be significant areas of overlap that would need to be integrated.

"If Microsoft were to seek a more integrated company with Yahoo, certain products or brands would be favored and others discontinued," Sterling added.

A combined Microsoft-Yahoo would improve their respective positions in the search market, but still wouldn't top Google, which has a dominant lead both in search engine usage and advertising, he said.

Yahoo didn't immediately reply to requests for additional information.

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Source: Microsoft