Microsoft’s bid for Yahoo!

“Inability to topple Google in online advertising is the main reason behind Microsoft’s proposal to acquire Yahoo!” 

Microsoft’s bid to buy Yahoo comes after the software giant’s failed attempts to emerge triumphant over Google’s online ad dominance. It is official. For the last two years, market buzz abounded about Microsoft being interested in buying Yahoo!. 

In May 2007, the New York Post carried an exclusive report that Microsoft had approached Yahoo!, to discuss about a friendly takeover. And on February 1, Microsoft announced its bid to buy the content portal for $44.6 billion in cash and shares. Yahoo! has responded to Microsoft’s overture with caution, saying that its Board will evaluate the proposal. But even if Yahoo! refuses, it is expected that Microsoft would go for a hostile takeover. If this comes to fruition, it would go down in the history books as the largest tech merger in the industry. 

“We have great respect for Yahoo!, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market,” said Microsoft CEO Steve Ballmer, in a press release. “We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners.”

Once the Yahoo! bid materializes, it would become the largest acquisition by Microsoft. The company’s biggest acquisition is Seattle-based aQuantive, a digital marketing company that Microsoft bought for $6 billion in 2007.

Analysts feel that the move signals the fact that Microsoft’s halcyon days are behind it. The software giant’s failure to challenge its archrival Google in online advertising, despite its marketing muscle and technology investment, is the main reason behind the move. Microsoft has simply not been able to replicate its success of Windows Operating System, productivity suite (MS Office) and web browser- Internet Explorer in the lucrative online advertising and search business. This was perhaps because it never expected the Stanford University-born start up Google to see such a stellar growth and dominance in such a short span of time. 

By the time Microsoft decided to get a foot in the door, it was too late to stem the tide of Google’s popularity and spread. Currently Google clearly leads the online advertising market romping home with a 65 per cent share followed by Yahoo and MSN Search. 

So, can number 2 and 3 combine forces to oust the Numero Uno?

Yahoo’s woes  

But before that, take a look at how Yahoo is faring. Yahoo announced at the end of January that it expects to layoff 1,000 people and also an uncertain and gloomy outlook for the fiscal.  The Sunnyvale-based firm has been struggling for the past few years while Microsoft has been fighting it out with Google in the online advertising business. 

In the 1990s, Yahoo virtually dominated the Internet. Even now it is the most visited site, but has been experiencing a decline in search. Besides, in spite of its powerful brand value and popularity, Yahoo failed to capitalize on the social networking craze as well.

Mixed reactions  

Initial reactions from market watchers are mixed whether a buyout of Yahoo is the best answer for Microsoft to take on Google. 

“We believe that a large acquisition of this size is fraught with risks broadly defined as potential integration issues with employees, cultures, and customers. Preliminary analysis suggests that the financial impact of this deal is likely to be detrimental for at least a couple of years. While Microsoft has been seeking a way to thwart the Google threat, we are unconvinced that this is the proper response,” said John DiFucci of Bear Stearns. 

Some Microsoft shareholders are believed to be skeptic on the takeover bid. They are of the opinion that Microsoft would not be able to beat Google even after acquiring Yahoo!  Others like JP Morgan felt that Yahoo! is better off inside a larger company with strong balance sheet and technology. There are also concerns about the fate of common products that Yahoo and Microsoft have in their stable and also integration issues. 

Regulators in the US and European Union would be investigating the deal. Whatever the outcome of the proposed merger, one thing is for sure: the Internet as we know is headed for a huge shake-up.

How the ‘Big Three’ stack up

Companies Yahoo Microsoft Google
Revenues $6.9 billion $51 billion $16.6 billion
Employees 11,400 79,000 16,805
Online advertising revenue  $2.9 billion $863 million $4 billion
Market share in online ad sales 18.4 per cent (Not known)  30 per cent
Search market (in the US) 21 per cent 5 per cent 66 per cent

A letter to Yahoo’s board from Microsoft CEO Steve Ballmer, made public by Microsoft, reveals details about what has been happening behind the scenes, and about the Redmond company’s plan.

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