Microsoft Swoops In on Yahoo

The software king, with its $44.6 billion bid for the portal, wants to catch Google in the ballooning online ad market

by Catherine Holahan

Concluding that neither company can successfully take on Google by itself, Microsoft (MSFT) launched an unwelcome takeover bid for Yahoo (YHOO). Microsoft said Feb. 1 it will pay $44.6 billion, or $31 a share, for Yahoo. The offer represents a 62% premium over Yahoo's closing share price Jan. 31.

The deal would marry the world's largest software maker with the owner of the most used Internet portal, helping the resulting company better grapple with Google (GOOG) in a market for online advertising that's expected to balloon to $80 billion by 2010.

Though Google's name was scarcely mentioned during a Feb. 1 conference call discussing the deal, it was clearly the 800-pound motivation for Microsoft's overture. "This market continues to grow and the leader continues to consolidate position," Microsoft Chief Executive Officer Steven Ballmer said during the call. Ballmer said he called Yahoo CEO Jerry Yang the night before to make the offer and has been pursuing the deal for 18 months. "Our companies really do share a vision for online services and advertising," Ballmer said during the call before U.S. markets opened. "There is no better way to increase scale and capacity than this acquisition."

No Improvement After a Year

In late 2006 and early 2007, Microsoft and Yahoo discussed ways to work together, including through a merger, Ballmer noted in a letter to Yahoo's board Jan. 31. Yahoo spurned the overtures, pointing to the "potential upside" of various efforts to improve its performance, including an effort to wring more profit from online advertising, Ballmer wrote. "A year has gone by, and the competitive situation has not improved," Ballmer said.

By some estimates, 42% of all online advertising dollars go through Google. Microsoft, Yahoo, and Time Warner's (TWX) AOL, combined, grab roughly the same percentage of the market, according to Jeffrey Rayport, founder and chairman of Marketspace Advisory, a strategy consulting firm. Some analysts said the transaction would help Yahoo and Microsoft compete with Google.

"Yahoo is under enormous pressure to realize value, and such a deal would serve this purpose," Standard & Poor's analyst Scott Kessler, who covers Internet companies, wrote in a research note to clients Feb. 1. Jim Yin, who covers software for S&P, said the deal "would help Microsoft compete more effectively against Google in search-engine and online advertising," though he added, "The merger presents integration challenges." (Like BusinessWeek.com, S&P is owned by The McGraw-Hill Cos. (MHP).)