Microsoft offers $45 billion to buy Yahoo


by Todd Bishop
SeattlePI.com
February 1, 2008

Microsoft Corp. announced a bid to buy Yahoo Inc. for nearly $45 billion on Friday, pursuing a blockbuster deal that could reshape the Internet industry by combining the assets of the two technology icons for a battle against online search giant Google.

The companies have discussed the possibility of a combination before, but Microsoft is making the acquisition attempt as a public proposal for consideration by Yahoo's shareholders, not as an agreement. According to details released by Microsoft, Yahoo declined in February 2007 to enter formal acquisition negotiations with the Redmond company.

Microsoft launched its own Web search engine in 2005 but has struggled to keep up -- posting a $732 million operating loss in its Online Services Business last fiscal year. Yahoo has likewise been struggling, this week announcing plans to lay off hundreds of workers. Its stock sank to a new four-year low after its latest quarterly earnings release.

Steve Ballmer, Microsoft's chief executive, expressed optimism about the possible combination Friday morning. The Yahoo bid is "the next major milestone in Microsoft's companywide transformation to embrace online services overall, and to invest very successfully in search and advertising," Ballmer said in a conference call with analysts.

Microsoft is proposing to pay $31 per Yahoo share, in cash and stock, or $44.6 billion. That's a 62 percent premium over Yahoo's closing share price Thursday of $19.18.

The purchase price would be paid half in equity and half in cash, Microsoft Chief Financial Officer Chris Liddell told analysts. It would reduce Microsoft's cash balance to its lowest point in years. The company, which has been spending large sums to buy back its own shares, reported $21 billion in cash and short-term investments as of Dec. 31.

Yahoo shares were up more than 9 percent in pre-market trading, to more than $28. Microsoft shares were down about 4 percent, to about $31.35.

In a Thursday letter to Yahoo's board of directors, made public Friday morning, Ballmer made it clear that taking on Google is one of the primary goals motivating Microsoft's attempt to acquire the Sunnyvale, Calif.-based Internet icon.

"Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition," Ballmer wrote in the letter. "Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers."

In a statement released Friday morning, Yahoo said its board "will evaluate this proposal carefully and promptly in the context of Yahoo!'s strategic plans and pursue the best course of action to maximize long-term value for shareholders."

If Yahoo wants to remain independent, "it will need to show investors that it is willing to take radical, value-creating steps," wrote analyst Mark Mahaney of Citigroup in a note to clients Friday morning. Outsourcing the company's search business to Google "strikes us as one of its few options" as an alternative to the Microsoft proposal, he wrote.

Microsoft's proposed acquisition faces regulatory hurdles. The Justice Department "would be interested in looking at the competitive effects of the transaction," agency spokeswoman Gina Talamona told The Associated Press.

"We've worked closely with our legal counsel, and we're confident we can obtain all the necessary approvals in a timely fashion," said Kevin Johnson, president of Microsoft's Platforms & Services Division, in an interview. Microsoft says it expects the deal to close in the second half of the calendar year.

Google dominates the Internet search business, with 58 percent of the market as of November, according to Nielsen Online research. Together, Microsoft and Yahoo would still trail Google significantly, with about a 30 percent combined share of the market.

"One of the biggest challenges facing MSN and potentially Yahoo! is the lack of scale in terms of search traffic compared to Google," wrote analysts with JP Morgan Securities. "We believe that a potential combination between the two companies could solve this issue and close the gap with Google from a search inventory and advertiser perspective."

Terry Semel, Yahoo's chairman and former chief executive, resigned from the company's board Thursday night, the company said in a separate statement.

A Yahoo deal would be the largest acquisition in Microsoft's history, eclipsing the $6 billion aQuantive acquisition made by the Redmond company last year. Yahoo reported more than 14,000 employees prior to its recently disclosed layoff plans. The company reported revenue of $6.97 billion and profits of $660 million last year.

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P-I reporter Todd Bishop can be reached at 206-448-8221 or toddbishop@seattlepi.com. Read his Microsoft blog at blog.seattlepi.com/microsoft.

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