Microsoft Bids $44.6 Billion for Yahoo

By Howard Schneider and Peter Whoriskey
Washington Post Staff Writers
Friday, February 1, 2008

Microsoft Corp. has offered to buy struggling Internet search provider Yahoo for $44.6 billion, a merger that would combine two of the technology world's most well-known names into a potentially potent competitor for Google in the lucrative Web search and advertising market.

Yahoo, which rebuffed earlier merger and business alliance offers from Microsoft, issued a terse statement saying that the "unsolicited proposal" would be "evaluated carefully and promptly in the context of Yahoo's strategic plans."

"We see this announcement as the next major milestone in Microsoft's companywide transformation to embrace online services overall and invest very successfully in search advertising," Microsoft chief executive Steven A. Ballmer said in a conference call this morning with analysts.

Ballmer called Yahoo chief executive co-founder Jerry Yang last night to discuss the proposal. Ballmer was reluctant to discuss the conversation in detail. "I said we're making a good offer. He said he would consider it," Ballmer said.

Microsoft, which manufactures the operating system and Web browser used on the vast majority of the world's desktop and laptop computers, has been struggling to capture more of the Internet search and advertising traffic that has become Google's undisputed province. The Web advertising market is growing rapidly, anticipated to increase from around $40 billion last year to $80 billion in 2010, Microsoft said in a news release.

Though the world's dominant software maker, Microsoft has not fared as well in efforts to promote its own search engine and other Web-based services, or to capture more of that advertising revenue. The offer for Yahoo reflects the importance that Redmond, Wash.-based Microsoft places on becoming more competitive in that arena -- and finding a way to erode Google's current dominance of it.

Google's share of the U.S. Web search market is estimated at 56 percent by Nielsen Online, compared to 17 percent for Yahoo and 13 percent for Microsoft.

Yahoo was one of the first companies to popularize Web searching, and it still attracts one of the Internet's largest audiences to its main Web site, an amalgamation of services and content that includes its search engine. However, the company has had trouble translating that audience into consistent financial performance. Earlier this week, it announced that 2007 profit had fallen 12 percent compared to the year before and that it would lay off 1,000 workers.

At $31 a share, the proposed purchase price represents a roughly 60 percent premium over Yahoo's closing stock price yesterday of $19.18. In addition, Microsoft's Ballmer said that if Yahoo's board rejects the deal, Microsoft would likely pursue a hostile takeover, attempting to lure Yahoo stockholders with an attractive price.

Yahoo stock has fallen 43 percent since last October, and Ballmer said Microsoft would take "all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value inherent in our proposal."

Yahoo shares closed up nearly 48 percent at $28.38, while Microsoft fell by 6.6 percent to $30.45. Google shares tumbled even more, by 8.6 percent, to $515.90. Google's share price has also suffered in recent months as its previously rapacious rate of growth began to slow. Google profit grew by 17 percent in the last three months of the year, disappointing analysts.

A Microsoft-Yahoo merger -- uniting the maker of best-selling software with one of the Web's most trafficked sites -- would be subject to antitrust and other regulatory reviews, both in the United States and in Europe.

A Justice Department spokeswoman said the agency would be "interested" in examining the antitrust implications of the deal, wire services reported.

An ongoing consolidation in the online advertising world largely has gotten a green light from regulators, including Google's recent purchase of DoubleClick, one of the leading Internet ad sales companies. In a news release, Microsoft said it thought the transaction would be approved in time for a deal to be completed by the end of the year.

In a letter yesterday to the Yahoo board of directors, Ballmer put the offer in a blunt context: Google is gaining increasing control of the online advertising market, and Yahoo's efforts to compete on its own are failing.

Yahoo and Microsoft have discussed different business alliances in recent years, but previous merger talks were rejected because Yahoo's executives wanted to pursue a new business strategy on their own, Ballmer recounted.

A year later "the competitive situation has not improved," Ballmer wrote. By combining, he argued, the two could consolidate their online audiences, cut costs on research and operation, and become a credible competitor to Google.

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

The offer was delivered the same day that Yahoo announced the departure from its board of former chief executive and longtime chairman Terry Semel, a change that had been in the works for months as Semel came under pressure for the company's poor performance.

One of Yahoo's central initiatives over the past year in particular has failed to meet expectations. The company's "Project Panama" introduced a new formula for choosing which ads to run with search results. Previously, the ads from the highest bidder for a search word got the most prominence. Under the new project, the number of "clicks" an ad had previously received would be taken into consideration, too.

But analysts said the initiative had little effect on Yahoo's market share, and that it seemed to be slipping against Google, which already had such a system in place.

"While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing," according to the letter.

Staff writer Debbi Wilgoren contributed to this report.

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