Microsoft bids $44.6 billion to buy Yahoo
SAN FRANCISCO/NEW YORK (Reuters) – Microsoft Corp offered to buy Yahoo Inc for $44.6 billion, in a bold bid to transform two ailing Internet businesses into a worthy competitor for market leader Google Inc.
In what would be the biggest Internet deal since the ill-fated Time Warner-AOL merger, Microsoft Chief Executive Steve Ballmer sent a letter to Yahoo’s board on Thursday night to offer $31 per share in cash and stock.
The price is a 62 percent premium over Yahoo’s Thursday close, but only about a quarter of what the Internet company was worth at the height of the dotcom bubble in 2000.
Yahoo would give Microsoft dominance in Web banner ads used by corporate brand advertisers. It also attracts more than 500 million people monthly to sites devoted to news, finance and sports, and Yahoo Mail is the No. 1 consumer e-mail service.
The shares of Microsoft, which has a market capitalization of about $300 billion, fell 6.6 percent as some investors worried the world’s top software maker may be overpaying for Yahoo and could have a hard time getting a return on its investment.
Critics say the two companies have too many overlapping businesses — from instant messaging to email and advertising, as well as news, travel and finance sites — and both are weak in the Web search market, where Google dominates.
“They have to do it because they’ve tried everything they can do to fix MSN. Yahoo is the most visited site in the world, so it goes without saying that, given the current valuation, this is the perfect time for them to buy it,” said Piper Jaffray analyst Gene Munster.
But he added: “Google is running away with the search market and that’s obviously the best part of the market. The likelihood that Google gets caught is slim to none.”
Yahoo said on Friday its board will evaluate the unsolicited offer. Its shares shot up about 48 percent to $28.33. The shares of Google, which has a market value of about $160 billion, fell 8.58 percent to close at $515.90.
TRANSFORMATIVE OR CULTURE CLASH?
Speculation about a Microsoft-Yahoo deal has swirled through the markets for more than a year, as investors looked for a joint stand against the ever more powerful Google.
Google’s share of the U.S. Web search market rose to 58.4 percent by December from 52.6 percent in January last year, while Yahoo’s fell to 22.9 percent from 26.9 percent, and Microsoft’s fell to 9.8 percent from 10.4 percent, according to comScore data.
Skeptics say Microsoft and Yahoo have very different corporate cultures and worry about a clash such as the one that marred AOL’s $182 billion purchase of Time Warner in 2001, which is seen as the worst merger in recent history. Time Warner Inc is now valued at only $57 billion.
The perception is that Yahoo, an iconic Silicon Valley company with a free-flowing, fun-loving attitude, may not fit in with the button-up, competitive Microsoft, the world’s biggest software maker.
“Culture is the big thing where people have some concerns,” said Jupiter Research analyst Bobby Tulsiani. “If they have anything in common, they’re both tired of losing to Google, so they can agree on that probably.”
CEO Ballmer, in his most aggressive move to shape the future Microsoft, said the deal would transform its money-losing Internet division, which it sees as critical to growth, into a profitable pillar of its business.
“We have been losing money. Our plan here would be to not lose money in the future,” he said on a conference call.
Ballmer said Microsoft has had on-and-off talks with Yahoo for 18 months, but was told by management a year ago that the timing was not right — in an apparent reference to Yahoo’s then Chairman and Chief Executive Terry Semel.
Semel was replaced by Yahoo co-founder Jerry Yang as CEO in June and resigned as chairman on Thursday.
“With the Semel roadblock now gone, there is reason to think this (merger) is now likely to happen,” said RBC Capital Internet analyst Jordan Rohan, noting Yahoo is running out of options in the face of a weakening business climate.
RICH VALUATION
Under the proposal, Yahoo shareholders can choose to get $31 cash, or 0.9509 of a share of Microsoft common stock. The deal in aggregate must consist of one-half cash and one-half Microsoft common stock, the software maker said.
Microsoft’s current stock price of $30.45 values Yahoo at around $30, or a rich 57 times forecast 2009 earnings, according to Reuters Estimates. In comparison, Google is trading at around 20 times forecast 2009 profit.
Some analysts said Microsoft was overpaying for a company that warned earlier this week it faced “head winds” in 2008, forecasting revenue below Wall Street expectations.
“To me, the premium seems exorbitant, for what is a dwindling business. I personally don’t see how the synergies of Microsoft-Yahoo is going to take on Google,” said Tim Smalls, head of U.S. stock trading at brokerage firm Execution LLC.
Global Equities Research analyst Trip Chowdhry said Yahoo is not worth more than $20 per share as its only worthwhile properties are Yahoo Mail, Yahoo Answers and Yahoo Finance.
But others said the price is low enough for rival bidders to emerge, noting Yahoo traded at $34.08 in late October.
“There could be a little more money on the table,” said Laura Martin, an analyst at Soleil-Media Metrics. “The company is in play. Yahoo will not be able to stay independent. Other bidders will emerge before this is over.”
Analysts cited Comcast Corp, Viacom Inc and General Electric Co among possible bidders, although they also said few companies had the balance sheet to compete with Microsoft or were as natural a fit for Yahoo.
As Yahoo shares are trading close to Microsoft’s valuation, it indicates few investors expect a sweeter offer.
ANTITRUST CONCERNS
Microsoft General Counsel Brad Smith acknowledged other bidders could emerge, but said any attempt by arch-rival Google to acquire Yahoo would face insurmountable antitrust hurdles.
Antitrust experts said regulators would likely take a close look at a Microsoft-Yahoo deal, but as the two are dwarfed by Google, the deal will ultimately likely be approved.
Microsoft said the online advertising market is expected to reach nearly $80 billion by 2010 from over $40 billion in 2007. It paid $6 billion last year to buy online advertising services firm aQuantive as a bulwark against Google’s growing position.
The software company forecast at least $1 billion in annual cost savings for the merged entity, from synergies in areas such as combining engineering talent.
Bernstein Research said the deal appeared to be less about expanded business potential and more about cost-savings that can be wrung out of shrinking redundant operations.
“We are relatively comfortable with (Microsoft’s) estimate of $1 billion in annual synergies. It appears to us that the majority of the synergies are on the cost side,” said the note from Bernstein analysts Charles Di Bona and Jeffrey Lindsay.
Morgan Stanley and Blackstone LP scooped the prize banking job of advising Microsoft on the deal, according to sources familiar with the matter, while Yahoo is being advised by Goldman Sachs Group Inc.
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