Hostile Takeover of Yahoo, by Microsoft!

by Swan | February 2, 2008 at 01:54 pm | 748 views | 5 comments

It's been two years of grueling on-and-off negotiations, with Microsoft's current offer to Yahoo standing at USD$44.6 billion (USD$31 per share.) It's just another attempt in Microsoft's plans to oust Google as the dominant search/advertising industry on the internet.

Is Google making you nervous Microsoft?

In one earlier attempt to close the gap between themselves and Google, Microsoft launched a web advertising platform and overhauled its MSN search engine. However, this unsuccessful move didn't even make a dent in Google, as the internet giant climbed higher and higher in the search engine ratings.

In a takeover of Yahoo! - whose shares have declined (more than 20%) this year, Microsoft would be able to add Yahoo's search engine traffic to it's own, not to mention increase its own advertising profile for current and potential advertisers. Merrill Lynch claim that the deal could trim Microsoft earnings next year by 5c per share in 2007.

In layman's terms, that means that after the proposed acquisition, Microsoft's shares are likely to descend to 5c per share, because they are buying a losing company with a loss in profits. However, this will surely take an upturn again as people become used to the idea and slowly forget the name of Yahoo!

Perhaps an even better explanation comes from Justin Post, a Merrill Lynch analyst:

Post arrives at the possible EPS hit by noting that the acquisition would reduce Microsoft's cash hoard, cutting its interest income. Issuing debt would boost interest expense. "The higher the price Microsoft has to pay the the acquisition, the more debt and interest expense necessary," he notes in an email.

The bids are being managed by some of the biggest names in the tech., industry - Steven Ballmer (Microsoft Chief Executive;) Ray Ozzie; Jerry Yang (Yahoo! CEO) and Terry Semel (Yahoo Chief Executive.)

A research note from another Merril Lynch analyst, said:

“possible acquisition of Yahoo! would be a strategic positive” for Microsoft. Specifically, such a deal would help advance Microsoft’s strategy on the Web, an area in which the software behemoth is something of an underdog.

With $34 billion in cash in it's coffers and in an interview with the New Yorker, Mr. Semel said:

Microsoft taking over Yahoo — that conversation has never come up … [We discussed] search, and Microsoft co-owning some of our search. I will not sell a piece of search. It is like selling your right arm while keeping your left — it does not make any sense.

That statement was made only a few weeks ago - when it was clearly known that the buy out would be put on the table. Steve Ballmer has long been known in the tech., industry as a "famously fierce competitor," to whom the idea of failure, is never considered - it's simply not an option to the high-powered tech., executive.

When he called Yang it clearly shocked the Yahoo! CEO., as he heard that Microsoft planned to make a hostile takeover, with the offer of USD$44.6 billion. He hadn't called Yang to negotiate, simply to inform him of what was planned - causing Yang to rush to his directors.

In an earlier interview Ballmer said:

“If we don’t get it right at first, we’ll just keep coming and coming and coming and coming,”

This explains the hostility of the takeover of Yahoo! He's clearly placing all his eggs in one basket, when he said:

A Yahoo deal, would represent “the next major milestone in Microsoft’s transformation.”

As end users, we can expect great things from Microsoft after (if?) this hostile takeover occurs. Steve Ballmer further claims that a 25% increase in advertising is planned for the future.

This news has also rocked the technology industry, including Google, which was founded by two Stanford graduate students, as was Yahoo! Microsoft has never been able to top Google in search and advertising and this fact is definitely a sore spot for Ballmer.

If the takeover goes through - this leaves the only two internet "big guys" duking it out for the prime position of top search engine and advertisers on the internet.

Do we really want Microsoft to dominate the internet? It could also mean that end-users will be divested of choice.

Microsoft will benefit from the billions of dollars that Yahoo!, has spent in the latter years to develop more efficient search and advertising technology. Even with these improvements, Yahoo has not grown as hoped and a layoff of 1,000 workers was announced this week.

There's a rather interesting article in the New York Times, that sounds like Semel is being used as a scapegoat for Yahoo's downturn. One shareholder states to him:

"I am surprised that you didn't apologize for the last three years of performance," activist shareholder Eric Jackson said at the company's annual meeting last year, shortly before Semel stepped down as CEO.

That's a bit nasty, wouldn't you say?

Interesting Link:

Microsoft Proposes to Buy Yahoo for #$31 per share in $44.6-Billion Deal by Information Week Staff

Sources:

Dealbook - Mergers and Acquisitions
Microsoft-Yahoo, From Rumor to Reality

Dealbook - Mergers and Acquisition
More Chatter About Microsoft-Yahoo Deal

The Street.com by Jonathan Berr
Merrill Note Massages Yahoo!

Image Sources:

The New York Times
Microsoft to Put More Money into MSN by Bloomerg News

New York Times
Competing With Google
Chart by Bloomberg; eMarketer

Alibaba.com

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jordan

at 14:35 on February 2nd, 2008

good stuff:

I'm not convinced that we can expect great things from an MS/Y merger... Microsoft isn't exactly great at delivering quality, though it clearly rules on the quantity front.

Miyspirit

at 14:59 on February 2nd, 2008

good stuff:

Swan, I like this story. It's good stuff....a super read & report...can't wait to see what happends!

Swan

at 15:34 on February 2nd, 2008

Hello Jordan and Miyspirit,

Thanks for your comments and flags.

You're right Jordan, Microsoft doesn't deliver, but I think that their belief is that acquiring Yahoo will help to boost searches and advertising exponentially, so that they can concentrate on the development of software and web products.

Who knows what the next few months holds, because that's how long it will take, if not a year or more. I feel a bit like you, I'm not going to hold my breath.

Glad you enjoyed it too Miyspirit. :)
~ Swan

René

at 16:07 on February 2nd, 2008

Feb. 2 (Bloomberg) -- Some Microsoft Corp. shareholders say
the software maker's $44.6 billion bid for Yahoo! Inc. may
backfire and reduce its ability to compete with Google Inc. in
Internet consumer services and advertising.

``This is a stupid deal, and I'm not happy,'' said Jane
Snorek, who helps manage more than $70 billion in assets at
First American Funds in Minneapolis. She said the firm began
selling much of its Microsoft position yesterday, when the stock
dropped 6.6 percent, the most since April 2006. ``I'm expecting
slow market-share erosion from Microsoft and Yahoo.''

looks like Microsoft lost ground on stock prices, and Yahoo gained.

Wonder what other stockholders feel about the probable loss of dividends in this takeover.

Swan

at 17:21 on February 2nd, 2008

Hello René,

This has already been forseen by Microsoft and is expected. In fact, they expect a downturn of as much as 5c per share, which will be as a direct result of buying a losing company.

They also know that their shares on the NASDAQ will do a 360 degree turn, because of the plans they have for this year 2008-2009.

Either way, we'll see what happens. Microsoft is notorious for not following through on whatever they start, though I happen to think they're dead serious this time.

Thanks for stopping by and commenting René, :)
~ Swan