Microsoft's Brilliant Bid for Yahoo!

Microsoft took a page out of Rupert Murdoch's book and made an offer for Yahoo that Yahoo can't refuse.

The $31 a share bid represents a 62% premium over the stock's closing price and will look like manna from heaven to Yahoo's beleaguered shareholders. Yahoo CEO and Founder Jerry Yang and the rest of the Yahoo board won't want to sell the company, but they'll have no choice. A refusal to engage with Microsoft and hammer out a deal would likely result in a shareholder rebellion.

For several reasons, the deal makes great sense strategically:

• There are now 4 big global Internet players—Google, Yahoo, Microsoft, and AOL—and the market will only support three (at most).
• Yahoo and Microsoft will be far more competitive with Google if they combine forces.
• This is a scale business: Combining the two companies will save at least $1 billion on research and development, marketing, administrative, and other costs.
• The combined company will be a "must-buy" for advertisers, which should improve the company's revenue growth rate.

I expect Yahoo will briefly consider its alternatives and probably make a couple of exploratory calls to other potential bidders, including Google and AT&T. I don't think either will emerge as serious contenders (and the traditional media companies just plain can't afford Yahoo).

I do not think Google will bid because doing so would only further antagonize regulators and customers who already think the company is too powerful. A source within Microsoft, meanwhile, tells me that AT&T encouraged Microsoft to make this bid and has no interest in going after Yahoo itself.

After "considering" the offer, therefore, I suspect Yahoo will conclude that it has no choice but to accept. Yahoo's management may try to get Microsoft to increase its offer, but unless they can first persuade Yahoo shareholders that remaining a stand-alone company is a better idea (a tough sell right now), they won't have much negotiating leverage.

The biggest risk to the deal will come after it closes. Microsoft will have to work hard to give Yahoo the freedom to compete with Google, some of which will involve competing with core Microsoft products. Microsoft will also have to find ways to retain Yahoo's key talent, who may not want to work inside a sprawling global behemoth. Microsoft appears aware of these challenges, however, and is talking a good game about how it plans to deal with them.

The bottom line: A brilliant move on Microsoft's part and the deal should quickly go through.

For more details, please see our full coverage on Silicon Alley Insider.

Disclosure: I have long-term positions in both Yahoo and Microsoft.

Comments

[realpolitic]

You know, Blodget should be in jail. He caused a lot of innocent people who followed his advice to lose their investments, as he grew wealthy.

[DHeil]

Henry: I agree this is brilliant for Yahoo and its investors, but it is NOT brilliant for Microsoft investors.


Years ago, Yahoo paid 5.3Billion for a little Dallas based company, broadcast.com. It quickly urinated that company's assets and people down the tubes. Mark Cuban and Todd Wagner quickly sold their resulting Yahoo shares and today are billionaires.


Microsoft is about to do the same. Where is the value in Yahoo assets? Mgmt? nope. Brand? not worth 45 billion. Cash flow? not worth 45 billion. Profits? nope.


Savings from cuts to Selling,G&A will not return adequately on Microsoft's investment. Most of Yahoo's page views are not revenue producing for advertisers. They will not be obligated to advertise on combined Microsoft/Yahoo pages anymore than just advertising on them separately.

This makes NO sense for Microsoft. I guess Microsoft cash is burning a hole in their pockets. This will only hurt Msoft share value.

[yappnmutt]

i don't know how brilliant the move is but it was inevitable given ballmer has had his eye on the prize for awhile. i think you are trying to pat yourself on the back for "predicting" the deal would be done. everyone knew it would happen. time was the unknown.
the fact that the offer is "hostile" says that yahoo is not thrilled by it and may charge mr softie a further premium for making the deal easier.

[Abroad]

"The $31 a share bid represents a 62% premium over the stock's closing price ..."

What's brilliant about that? Any moron with deep pockets can do the same.

Bill Gates was dismissive about Google buying YouTube in much the same way. But at least these two companies had similar cultures.

Getting Yahoo to blend into MS will be a major problem.

All in all it looks more like a desperate attempt to regain market shares by buying out the competition. As usual.

[Dunnage]

MS needs a content platform, and this is it.

Also watch ATT, already using Yahoo,and Windows Mobile party down. Wireless Internet, thru cell co. will be gigantic.

[StuporMundi]

I wonder why Microsoft shareholders would be happy about this bid. How long will it take them to earn back their $45 billion in... "must-buy" advertising? Sounds like a crock to me.

Plus, the acquisition may divert resources from Microsoft's core business, whatever that might be these days. Sounds like they want to get into an exciting new business area: layoffs.

[klassik]

Anti-trust (US,Europe). I don't think this deal will go thru'...

[rickroberts]

I'll be moving my Flickr pictures over to Picasa. I don't want to feed the beast.

[InofTouch]

funny, I don't see the same crowd reaction from last year merger between News Corp and Dow Jones

techcom any one

[g4dualie]

The first order of business will be to dump the FreeBSD underpinnings of Yahoo and convert it over to a Windows Server product.

That alone will be enough to disrupt Yahoo services for a good long while.

Microsoft has been tweaking Live for two years and hasn't been able to break out of the single-digit percentage of the internet searches pie.

They've been stagnating at 9 percent but 44 billion dollars will immediately boost Microsoft into 2nd place with 31 percent, behind Google's 58 percent.

It took Microsoft Live two years to achieve 9 percent. How long will it take for them to take Yahoo to 32?

[PhxJustice]

To all of you Microsoft haters: Get over yourselves!

Microsoft is not the evil company and never has been. To me, this is a brilliant move by Microsoft and will only strengthen its online presence, especially if it leaves Yahoo as a stand alone entity within Microsoft.

[Weathermaker]

Yahoo sucks. I moved everything from Yahoo to Google/MSN. I still cannot believe Yahoo wants you to pay for POP3. All my email accounts are conveniently integrated in Outlook, except @yahoo.com. I will not spend $20 for a service that Google or MSM give away for free.

[navalvet]

Google has chewed up Yahoo and Microsoft has chosen to challenge Google, on the newcomer's turf, advertising and search. Microsoft can afford to lose billions, which is the probable result.

[ThePhantom]

I was an early adopter to Yahoo but have over the past two years switched everything to gmail/google calendar etc.

I just hated the flashing advertisements and other offensive ads that yahoo threw in my face, including male potency pills and all that stuff. Google never ever does that.

Yahoo is evil and they belong with Microsoft.

Let Google crush them both. Go Google.

[ratcityreprobate]

The merger of two floundering giants is seldom pretty. Microsoft will be in a swamp for a decade with this one. I should say, even deeper in a swamp. Yahoo stockholders happy. Microsoft stockholders not so much, it may be too late to get out whole for many.