Microsoft Takeover Bid for Yahoo!

This morn, all eyes are on the takeover proposal, in a letter from Steve Ballmer to Yahoo’s Board of Directors, stating an offer of $31 in cash or 0.9509 of a share of Microsoft common stock per share for Yahoo (YHOO). The total deal valued at $44.6 billion — a huge 62% premium to Yahoo’s closing price of $19.18.

The most interesting part of this is that Mister Softee seems to have waited until Google had its first bad earnings report — missing the earnings consensus by 2 cents, and perhaps looking in their eyes, vulnerable. Perhaps it was coincidence, but the timing looks fortuitous.

A few questions immediately pop up:

Why is Ballmer & Co. paying such a big premium? Does this imply the entire Tech market is hugely undervalued — or is Microsoft (MSFT) desperate to catch up with Google (GOOG)?

And since Mister Softee was so desperate to stop the Google/DoubleClick deal on Anti-Trust grounds, it makes me wonder if there will be any legal issues between a marraige of Yahoo and Microsoft. Obviously not for search — their combined market share is still tiny compared to Google. But consider what these two companies are: the biggest software maker now wants to get together with the biggest web portal. That could certainly raise some valid anti-trust issues.

What is not known yet is how the two different search technologies — Yahoo’s Panama, and Microsoft’s — will integrate.

I’ll go even a step further: Mister Softee’s biggest cash cows —
Windows and Office — look shakier than they ever have. There are real
competitors for PCs (Apple, Linux) and lots of free or nearly free
office software (Open Office, Google Apps). I assume Microsoft is
projecting out current trends 5 and 10 years; they might truly believe
that if they can’t compete in the online search/advertising space, they
are in trouble.   

Here’s the ironic part: The 2 most visible losers in the search area
may be getting together — and somehow, that’s worth 150 point swing to the Dow futures.

I guess the negativity isn’t quite as excessive as some people claim!

~~~

Some recent, related headlines:

Yahoo Says Former Chief Semel Steps Down as Chairman (Bloomberg, 1/31)

Google posts 17% profit gain, but shares slide lower (Marketwatch, 1/31)

• and the WTF headline: Google’s Loss Is Murdoch’s Gain (NYT’s Bits)

>

Source:
Microsoft Letter to Yahoo!
PRNewswire-FirstCall, February 01, 2008: 06:30 AM EST
http://money.cnn.com/news/newsfeeds/articles/prnewswire/NYF04001022008-1.htm

What's been said:

Discussions found on the web:
  1. sysin3 commented on Feb 1

    maybe MSFT can improve YHOO’s sludgy web code the same way they improved XP into Vista.

    oh, wait, i guess that wouldn’t be a good thing 😉

  2. dblwyo commented on Feb 1

    A couple of other strategic questions that should be on the table but first a pointer. Ken Auletta was recently on the Rose show talking about GOOG, YHOO and the B2C business in general. A very good show, some useful insights with the caveat that Auletta is a writer and reacting to things rather than a technologist who’s seeing deeper:
    http://tinyurl.com/23wp3z

    MSFT has gotten very large and unwieldy indeed so 1) how’re they going to make Yahoo re-build it’s organization and then 2) align one big mess with another ? Do a search on Code Red the emergency MSFT efforts to save Longhorn which brought it out late, emasculated by 3/4+ and with a resource intensive and non-appealing APPL-imitating feature set. So 3) what makes anyone think MSFT is the champion coders and will be able to save YHOO there ?
    What is YHOO’s fundamental business model and why isn’t it working ? The COO was recently interviewed at Davos and couldn’t tell the MoneyHoney what their strategic plan was. Any good exec should be able to be clear & compelling with an elevator speech if they know it. So (4) Yhoo have a clue as to what their business is and should be ?
    Bottomline – this one behemoth over-paying because it can for another, smaller behomth which is much worse shape strategically, technically and structurally. A C+ firm buying a D/D+ firm. Yet both have inherent strengths that could be their salvation. Just not in this form.
    All of course IMHO 🙂

  3. John commented on Feb 1

    I am watching CNBC discussing the takeover — there is absolutely zero critical thinking going on. None.

    They picked up the pompoms, and they are doing cartwheels. No intelligence whatsoever.

    I picked up more issues and thinking here in a short blog post and a few comments than in their past 45 minutes of coverage.

    It boggles the mind.

  4. grumpyoldvet commented on Feb 1

    watching CNBC money shows for insightful information is an exercise in foolishness….the whole crew, with the exception of David Faber, are clowns

  5. ht commented on Feb 1

    Short tech at the open

  6. Dude commented on Feb 1

    I can’t believe Microsoft is buying a company with a questionable business model for such an absurd amount of $$. I guess now is a good time to short MS stock.
    This must be the top of Bubble 2.0 in IT, sort of like TimeWarner buying AOL for 20bn.

  7. eh commented on Feb 1

    What is not known yet is how the two different search technologies — Yahoo’s Panama, and Microsoft’s — will integrate.

    Does it really matter? Does anyone seriously believe this will help them take significant search share from GOOG? I could not be that atypical: I use GOOG to search (sometimes AltaVista), but never MSFT or YHOO. I seriously doubt this will change.

    MSFT has serious delusions of grandeur.

  8. Steve Barry commented on Feb 1

    Let’s see…YHOO gains 13.75B in market cap at current bid…but MSFT is losing 13.5B. So let’s rally Nas futures off weak GOOG numbers and staring at a horrible housing number. Not even going to discuss the myriad of ways this “deal” will fall into the “Synergy Trap”.

    Short with both fists.

  9. 2and20 commented on Feb 1

    I’m not sure where Yahoo has value. I use Yahoo Finance, and find it excellent, it’s 100 times better than Google’s dire offering. But I’ve no idea how they monetise my use. Maybe they should start a brokerage firm and link it in?

    As for search, I don’t think I’ve ever used Yahoo. I’ll be amazed if a competitor to Google appears even within the next 10 years. And the whole idea of a “portal” just seems bizarre to me…I guess it’s your average mom who doesn’t know how to change the home page that drives traffic there…

    If this is what’s taking the market up, I’m using it as a great opportunity to dump bad longs and get short.

  10. eh commented on Feb 1

    I use Yahoo Finance, and find it excellent, it’s 100 times better than Google’s dire offering.

    AOL Finance is every bit as good and gaining market share.

  11. Karl K commented on Feb 1

    OK, some dose of reality to the pesssimist MSFT bashers on here.

    First, MSFT has incredible financial power-it has $20 billion in cash and ZERO long term debt to go along with its $350 billion mkt.cap. It could borrow $50 billion in a nanosecond. Ballmer probably has a platoon of assistants fielding the calls from the investment bankers now.

    Second, and I know this may be a surprise to you, YHOO is the #1 page count site on the internet…that’s right, the #1, more than Google. See:
    http://www.alexa.com/site/ds/top_500

    Third, the problem with YHOO is margins–they suck. If YHOO doubles its margins to industry norms, that’s $6B annually in added net. MSFT can bring that discipline.

    Fourth, MSFT’s position in the corporate market is so strong it’s virtually inviolable. Open Office is not threat. Google apps? You’re joking. They have no real application power.

    Fifth, Vista. As someone who is reluctant to move from XP to Vista, guess what? I am going to HAVE to. And so are all of you. It is just a matter of time. And guess what? As MSFT releases its service packs, it will get better and better and more stable because it is a the first time…in 20+ years…MSFT has made a true un-kluged operating system.

    Bottom line. IF MSFT wants to make this deal, it’s gonna happen

  12. Steve Barry commented on Feb 1

    QQQQ will get slaughtered today…MSFT AND GOOG tanking plus these shocking jobs numbers

  13. Will G commented on Feb 1

    1 Crappy Search & Email Provider + 1 Crappy Search & Email Provider = Legitimate Threat to Google?

  14. Beachin commented on Feb 1

    I don’t think they will integrate the search algorithms. They will more likely kill one off (while talking about integration) and save significantly by cutting engineers. Msft should be able to make more profits from yhoo than yhoo could if only through cost savings.

  15. Steve Barry commented on Feb 1

    Barudjian (sp?) on CNBC is a great contrary indicator…he is spinning the jobs positive due to low wage pressure. When he turns bearish, time to cover shorts.

  16. pmorrisonfl commented on Feb 1

    Awhile back, just after Ray Ozzie took over at MSFT, they published a strategy letter including a focus on ad revenues from search. Their long-time strategy has been to buy a technology (86-DOS, Sybase) or company in the space they’re interested in and refine it to become/overcome a market leader. Sometimes they buy tech leaders to kill off a competing product (FoxPro).

    Compared to Microsoft, Yahoo has a more modern technology base for delivering large-scale web applications. Windows really isn’t going to do it, and this may be a recognition of that on their part. Unfortunately for them, Google is light-years ahead of Yahoo on this, and huffing and puffing a little harder isn’t going to help them catch up. It’s sort of sad to see MSFT in their dotage.

  17. wally commented on Feb 1

    The two companies deserve each other. However, it does not matter because the sale/merger will not be approved. Microsoft has burned too many bridges and thumbed it’s nose at too many regulators. It is a monopoly and it has acted like one and shown no remorse for it.

  18. scorpio commented on Feb 1

    the only company in all of tech with a cash hoard just pissed it away. portfolio theory would tell MSFT to distribute that cash to shareholders, let them buy YHOO at $19/sh IF THEY LIKE, not the gigantic premium. two failing companies. MSFT had a good idea 30 years ago

  19. scorpio commented on Feb 1

    dance, Monkey Boy, dance!

  20. Eric Thomas commented on Feb 1

    I think it has something to do with Tivo’s court victory yesterday coupled with a deal with CBS to develop a TV ratings system. Google is a large holder of Tivo and a potential future colaborator. It has been rumored that Tivo and Google are working on a TV on demand service. Anyway, Microsoft saw the future staring them in the face and they weren’t apart of it. So, they went out and made themselves apart of it.

  21. TD commented on Feb 1

    Your son is a fine Dancer

  22. Ross commented on Feb 1

    Which one is the drunk and which the light pole?

    Oh well, it gives Justice something to do instead of doing a RICO on the banks…

  23. la grande poussée commented on Feb 1

    OK lets look at an analogy: GM buys Ford – how will that affect Toyota? This is clouding a very bad jobs number – and the talking heads – as dumb as they are – this will be a pre-superbowl game that might be better than the main attraction!
    peachin

  24. michael schumacher commented on Feb 1

    Classic case (for many reasons mentioned above) of much more money than brains.

    Marriage of mediocrity….I guess those stock options are worth something now…..Mr. Yang and Ms. Decker

    Ciao
    MS

  25. JustAGuy commented on Feb 1

    Sorry, Karl, I will never use Vista. I got off the Microsoft train a long time ago and I will never go back. If this deal for Yahoo goes through, that will be the end of my Yahoo usage.

  26. Steve Barry commented on Feb 1

    The deal is now destroying value…MSFT down 14B, YHOO up 12.5B. So much for Merger Friday.
    How were those jobs numbers?

  27. Vermont Trader.. commented on Feb 1

    Just looking at mechanics of deal You can buy YHOO now at 10% discount to cash offer and get a call option on .95 shares MSFT that would be in the money if MSFT trades at 32.65.

    FWIW

  28. Francois commented on Feb 1

    “Barudjian (sp?) on CNBC is a great contrary indicator…he is spinning the jobs positive due to low wage pressure.”

    Mbwahahahaha!
    Since when has wage pressure been a significant factor in the econ big picture in this country?

    This guy need an urgent visit from the Clue Fairy.

  29. Steve Barry commented on Feb 1

    You would think given economy, stock market, credit crisis, housing that we would see overly bearish 10 day total put/call on the markt. To the contrary….it has plunged today to .99 and needs to get to 1.3 to mark a good market bottom. This is a tremendous short opportunity. Dow is hitting massive resistance at 12750 also the right shoulder of a massive topping pattern.

  30. Bob A commented on Feb 1

    and msft’s own attempts to do anything creative are miserably lacking. Has anyone tried LIve.com Maps in 3D. It’s slower than a salted slug. Live search.. on windows mobile.. aarrgh. It works but it’s just incredible how needlessly cludgy you can make something. Know anybody who LIKES Vista? but then YHOO is even worse in these creative genius sort of areas.

  31. Karl K commented on Feb 1

    Really, reading this set of comments is totally amazing. It is amazing how totally totally wrong people can be is such a short amount of time.

    No wonder most folks lose money in the market.

    Let’s take ’em one at a time.

    I can’t believe Microsoft is buying a company with a questionable business model for such an absurd amount of $$.

    Can anyone on here do arithmetic? If MSFT gets YHOO’s margins up to industry norms — and that’s BEFORE any strategic synergies — MSFT will get a return of 7% on its investment. It’s borderline, but it’s not absurd.

    Does it really matter? Does anyone seriously believe this will help them take significant search share from GOOG?

    It’s not JUST about search. It’s about the entire suite of offerings. And as I noted in my post above, YHOO is the #1 site in page views. MORE THAN GOOGLE.

    the only company in all of tech with a cash hoard just pissed it away.

    Do people here know how to read press releases?? MSFT has proposed to acquire YHOO for $31 per share in cash or stock. The consideration would be payable in the form of $31 in cash or 0.9509 of a share of MSFT common stock.

    The two companies deserve each other. However, it does not matter because the sale/merger will not be approved.

    Really? If anything, one can make the argument that this merger will actually INCREASE competition as Google is on its way to dominance (thought it isn’t there yet).

    The deal is now destroying value…MSFT down 14B, YHOO up 12.5B. So much for Merger Friday.

    Uh…I have a word for you here…wait, it’s on the tip of my tongue…oh, yeah, that’s right, arbitrage. That’s markets working.

    Oh, and some more arithmetic. If the two companies were netted now with those numbers, the combined entity would be down just $2B which is way way under 1% of total cap.

  32. joseph commented on Feb 1

    Why buy Yahoo now?

    The MS ANTI-Trust remedies, most of which were to expire by Feb 2008, were just extended to Nov 2009. That’s a long time in IT and probably squashed any plans MS had to leverage their OS/browser to gain share over Google.

    This week Yahoo announced layoffs (1/14 employees) so how can Yahoo say “no” to this offer?

    “Microsoft (NSDQ: MSFT) had hoped the United States government would lift a significant portion of its anti-trust restrictions against the company at the end of the month. That’s not happening. Judge Colleen Kollar-Kotelly Tuesday extended monitoring of Microsoft until November 2009.”
    http://www.informationweek.com/news/showArticle.jhtml?articleID=206100319

  33. Steve Barry commented on Feb 1

    Karl,

    Arbitrage is when the stocks involved are trading not exactly at the deal price. What seems to be happening here is value going from MSFT stock into YHOO stock, with the synergy of the deal causing 1.5 B to evaporate. Synergy is supposed to be 1+1>2, not 1+1<2. But it is no surprise because these mega mergers usually destroy shareholder value and MSFT has never done one this size. It is doomed to fail.

  34. Tom B commented on Feb 1

    Nice to see all the common sense over here on the Big Picture. The SekkingAlpha crowd seem largely whipped up by the hype (or the opportunity to dump YHOO shares) at this time.

  35. twistytop commented on Feb 1

    Did Ballmer promise not to throw a chair at them if they accepted?

  36. Vermont Trader.. commented on Feb 1

    So assuming the deal goes through(which is a big assumption)

    Why would you buy MSFT instead of YHOO here? Can anyone think of a reason? You have a 31.00 put on Yahoo so you will at least get that and a call on MSFT so you participate in upside in MSFT above 32.65.

  37. twistytop commented on Feb 1

    As A nerd, I think this would be a disaster. Yahoo has been a big contributer to the open source community. They just bought Zimbra for instance which is an open source collaboration software suite (think Microsoft Exchange, Sharepoint, etc).

    What happens to these projects if Microsoft buys Yahoo? Killed most likely or at least severely curtailed.

    In short I think this is a bad thing on many different levels.

  38. Wayne C commented on Feb 1

    Smells of Time Warner + AOL to me.

  39. michael schumacher commented on Feb 1

    If the google doubleclick deal is approved (or it seems it’s about to) then why not this one?
    This administration has shown that it doesn’t care what it is just as long as it makes money from it. Look at the FCC and the FTC they are approving deals that wouldn’t see the light of day in previous administrations.

    People that think it won’t get done for anti-competitive reasons do not understand how the rubber stamp known as Bushco operates.

    It will get done because simply because we will be presented it as “good for the economy”…..’nuff said

    Ciao
    MS

  40. michael schumacher commented on Feb 1

    and the Justice department????
    Please spare me that as they are more interested in investigating chocolate prices than why the NYMEX trades oil at a $30 premium

    Ciao
    MS

  41. Tom B commented on Feb 1

    “People that think it won’t get done for anti-competitive reasons do not understand how the rubber stamp known as Bushco operates.”

    The EU will be annoyed. I don’t know whether that makes any difference……

  42. Karl K commented on Feb 1

    Steve Barry wrote:
    Arbitrage is when the stocks involved are trading not exactly at the deal price. What seems to be happening here is value going from MSFT stock into YHOO stock, with the synergy of the deal causing 1.5 B to evaporate.

    Excuse me..I should have said RISK arbitrage.

    Meanwhile, I wouldn’t be so hasty as to conclude that today’s trading is somehow an indicator of the value creating/destroying prospects of this deal.

    And, again, based on the combined entity, $1.5 billion down is nothing…it’s a third of 1 percent. That can be made up in a an hour of trading next week.

  43. edhopper commented on Feb 1

    No one seems to have mentioned it (or I missed the comment) but;
    Time Warner and AOL was greeted favorably by the business press also.
    Didn’t turn out so well.

  44. Karl K commented on Feb 1

    Ed Hopper
    No one seems to have mentioned it (or I missed the comment) but;Time Warner and AOL was greeted favorably by the business press also.
    Didn’t turn out so well.

    And there have been dozens of mergers/acquistions that have worked out well.

    This means nothing.

  45. Tom B commented on Feb 1

    “And there have been dozens of mergers/acquistions that have worked out well.”

    I saw AOL/TWX as a train wreck immediately. But, contrary to my expectations, HP/Compaq appears to have not been a disaster. One factor easily missed, though, are opportunity costs. IMHO, the amount wealth created by a merged company is often less than it would be had the companies stayed separate. And this can be true even if the merger looks profitable and successful on the balance sheets. I guess I’m talking about “rate of wealth creation”. I’m a small time investor– maybe you pros have ways to model this.

  46. festerpig commented on Feb 1

    Vermont Trader – IMHO, I think part of the MSFT buying yahoo is to kill off the Linux/Open Source threat. It is not just Apple, Linux is definitely a very viable threat to MSFT dominance. Yahoo has been a great sponsor spearheading Open Source – so buy the sponsor and jam the brakes on Linux and return another day to deal with Apple.

    Also, I don’t buy any bit of that 1+1 > 2 theory that those cheerleaders on CNBC were going on about that it will be a threat to Google.

  47. Don commented on Feb 1

    Microsoft + Yahoo! = Kmart + Sears

    Walmart wasn’t too worried by the merger of the two rivals it beat out to become number one. I don’t think Google’s got much to be concerned about, either.

    (That said, if Yahoo! loses its stupid name w/ the exclamation point, then for me, the merger was worth it.)

  48. edhopper commented on Feb 1

    “And there have been dozens of mergers/acquistions that have worked out well.

    This means nothing.”

    Karl,
    You obviously think I just pulled a bad merger out of my ass for comparison.
    There are many parallels between this and the TW/AOL merger.
    The areas on the surface that seem to make this merger worthwhile , are on closer inspection, not sound. IMHO

  49. Eren commented on Feb 1

    first, i own yahoo.
    they have cash, ali baba, finance web site, yahoo japan etc. I started to use yahoo search. it is excellent. google search does not give the manufacturer’s web site if you search for a product. i hated this. then i switched to yahoo. 1 week later i bought yahoo shares and sold some puts. I closed my puts today though. i find google searches too commercialized.

  50. Minmex commented on Feb 1

    Yahoo is the new AOL They can’t even make their email program work right, you gotta wonder…

    Must be for the chance to stomp on OSS/Linux stuff.

    Good thing this came up..I was about to go short.

  51. Barry Ritholtz commented on Feb 1

    What about a name?

    MicroHoo? Or do you prefer YaSoft!

  52. babycondor commented on Feb 1

    AOL (an overpriced, nightmarishly kludgy internet service and content provider) bought Time-Warner (a once-great but by then wildly out of sync content provider). The Deal from Hell, as history has shown.

    Microsoft (an oversized, kludgy and often clueless software company) is proposing to buy Yahoo (a highly successful Internet ACCESS provider in lucrative partnerships with AT&T, Verizon, and others, with darn good Finance content to boot).

    It could work. Time will tell.

  53. Paul Kedrosky commented on Feb 1

    Early this morning Goldman made an awfully timely call, putting out an analyst note at 3:56am PST suggesting that Microsoft should buy Yahoo — only to freeze analyst coverage of Microsoft at 6:55 AM PST on the news that Microsoft has offered to buy Yahoo and it is providing i-banking support. Yay! Boo! Yay! Or something.

  54. dogcatcher commented on Feb 1

    Eren,

    Yahoo! Inc(Y!Inc) does not “have” Yahoo Japan(YJ) in any sense. YJ is a joint venture between Y!Inc and Japan’s Softbank. Y!Inc has a 33% stake in YJ, Softbank is the largest shareholder with 41%. The relationship between Y!Inc and YJ is best thought of as a licensing arrangement in which Y!Inc receives fee income for YJ’s use of the same and some search-related technologies.

    Y!Inc seems to have no interest in the Japanese market, as evidenced by this sale of Overture Japan (a very profitably business) to YJ for pennies on the dollar:
    http://breakoutperformance.blogspot.com/2007/09/questions-about-yahoo-and-overture.html

    Interestingly, no one in the financial press (or in the crowd that is constantly monitoring the search engine and paid search market) seemed to have noticed that ridiculous sale, so kudos to Eric Jackson for making that info available on his Breakout Performance website.

    That sell-off of Oveture Japan is what hurt Y!Inc’s 2007Q4 international segment revenue decreased from 2006Q4. YJ had a great Q4.

  55. ef commented on Feb 7

    You are probably right. Most IT folks know this is more true than not: “Boy, one thing that I’ve always said, and it’s truer now than ever, is that M$ is a marketing company, not a software company.” If you ask Borland folks, they’ll say MS even “bought” Anders Hejlsberg from Borland 😉

    Yahoo has a lot of technology components, everything from mail, groups, shops, yui, flickr photosharing, etc. Just do a search on “yahoo buys”. Hey, even Mark Cuban was rewarded handsomely from Yahoo. 🙂 According to Alexa, yahoo is ranked #1 for traffic.

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