Microsoft Bids for Yahoo!
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Finally! A Bidding War!

By Charles Moffat - February 1st 2008.

Two years I predicted that Google and Microsoft will have a bidding war over the dinosaur remains of Yahoo. See Google Vs Microsoft: The Fight Over Yahoo's Remains.

Today Microsoft Corp. has pounced on slumping Internet icon Yahoo Inc. with an unsolicited takeover offer of US$44.6 billion in a bold bid to challenge Google Inc.’s dominance of the lucrative online search and advertising markets.

It feels good to finally be getting ready to sell my old Yahoo stocks.

The surprise offer of $31 per share comes when Sunnyvale, California-based Yahoo in a vulnerable position (yesterday it was worth a mere $19 US/share). The $31 bid is a 62% premium over yesterday's closing bid.

In a statement today, Yahoo said it will “carefully and promptly” study Microsoft’s bid.

With Yahoo's profits steadily sliding their stock slipped to a four-year low earlier this week ($18.58) and a new management team has been trying to steer a turnaround but sees more turbulence through 2008.

The announcement from Microsoft sent Yahoo’s share price up 60 per cent in premarket trading, while Google fell eight per cent as investors from Google jumped on the opportunity. Google's profits in 2007 rose another 51%, short of the 60% or more rise some investors were predicting.

In a letter to Yahoo’s board of directors, Microsoft CEO Steve Ballmer indicated the world’s largest software maker is determined to bring the two companies together.

Since reaching a 52-week high of $34.08 in October, Yahoo shares have fallen 46 per cent. Yahoo climbed $10.40 a share, or 54 per cent, to $29.58 in premarket trading. Microsoft shares fell $1.40, or 4.3 per cent, to $31.20.

Ballmer revealed in the letter that Yahoo had rebuffed a previous overture a year ago, saying it had a turnaround in the works. But he pointedly noted Yahoo has instead deteriorated significantly.

“A year has gone by, and the competitive situation has not improved,” Ballmer added.

Microsoft’s previous offer was rebuffed by Terry Semel, who stepped aside last year as chief executive under shareholder pressure.

Microsoft sent its latest takeover offer to Yahoo late yesterday, shortly after Semel resigned as chairman. The letter is addressed to Semel’s successors, new chairman Roy Bostock and the current CEO, co-founder Jerry Yang, who is one of Yahoo’s largest shareholders.

“Microsoft’s consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers,” Ballmer wrote.

In a prepared statement, Yahoo said its board “will evaluate this proposal carefully and promptly in the context of Yahoo’s strategic plans and pursue the best course of action to maximize long-term value for shareholders.”

Under terms of the proposed deal, Yahoo shareholders could choose to receive cash or Microsoft common shares, with the total purchase consisting of 50 per cent cash and 50 per cent stock.

Microsoft said it sees at least $1 billion in cost savings generated by the combination, and intends to offer significant retention packages to Yahoo engineers, key leaders and employees. The software giant said it believes the takeover would receive regulatory clearance and close in the second half of 2008.

Signalling Microsoft doesn’t intend to take no for an answer, Ballmer wrote that the company “reserves the right to pursue all necessary steps to ensure that Yahoo’s shareholders are provided with the opportunity to realize the value inherent in our proposal.”

While Yahoo is struggling, Microsoft is thriving. The Redmond, Wash.-based company last week forecast a rosy 2008 — despite broader economic worries — after it blew by Wall Street’s expectations for a second consecutive quarter.

Now the question remains:

Will Google make a bid also?

A bid of $50 billion (approx. $35/share) or more would be a good start.

I would argue that Yahoo! stocks are still undervalued right now, when you consider that despite everything Yahoo! is still #1 in terms of popularity. See Yahoo's popularity stats at Alexa. Yahoo! is still profitable too, despite huge competition from Google (which is #2 in popularity). Microsoft/Live occupies 4th and 5th places while Youtube (owned by Google) is 3rd.

Yahoo Rejects Microsoft Bid

Yahoo formally rejected a $45 billion unsolicited bid from Microsoft Corp. Monday, saying that the offer is not in the best interest of shareholders, but adding it is willing to look other options.

"The board believes that Microsoft's proposal substantially undervalues Yahoo, including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments," said the statement.

But the statement also seemed to leave the door open to a higher offer from either Microsoft or another suitor. It said its board "is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment."

"We remain committed to pursuing initiatives that maximize value for all stockholders," it added.

Microsoft offered $31 a share for the firm in a cash and stock bid on Feb. 1 - a 62% premium from the previous day closing price for Yahoo.

Microsoft made that offer less than a week after Yahoo announced it would lay off 1,000 employees by mid-February, citing what CEO Jerry Yang described as "headwinds" facing the company.

Yahoo also reported lower fourth-quarter earnings that still beat Wall Street's modest expectations for the company, but gave a 2008 revenue forecast that disappointed analysts.

Still Yahoo leads in online display advertising revenue and its various Web sites are the most visited by U.S. Internet users, and No. 3 worldwide, according to tracking service ComScore.

A Microsoft-Yahoo combination also would create a powerful No. 2 player in the online search business, with nearly 30% of the market. But that would still be about half of the U.S. search market share that Google now commands.

The rejection was not a surprise and had been expected by investors since late last week. Some believe this is part of an effort by Yahoo to get a higher sales price from Microsoft.

While the offer represented a large premium from the recent pre-offer price, it only represented the price level seen for Yahoo stock in November.

But getting a higher price from Microsoft would be easier for Yahoo if an alternative bidder had presented itself. While Google has voiced criticism of the proposed deal, it's not clear that the Internet search leader would be able to make a bid for rival Yahoo. And no other company has been seen moving to make an alternative offer.

Last week, News Corp. (NWS, Fortune 500) Chairman Rupert Murdoch, who has been buying online properties for his media conglomerate, said his company would not bid for Yahoo.

Time Warner (TWX, Fortune 500), which held talks in the past about combining its AOL unit with Yahoo, appeared with its own announcement last week to be moving to shed part of its AOL operations, not add to them. CNNMoney.com is a unit of Time Warner.

Microsoft could decide to take the $31 a share offer directly to Yahoo shareholders, turning the unsolicited bid into a fully hostile one.

Microsoft did not have an immediate response to the statement. Shares of Yahoo opened Monday up 2.4% from Friday's close, while shares of Dow component Microsoft were little changed. Shares of Google opened nearly 1% higher.

This is not the first time Microsoft has been rejected in an attempt to acquire Yahoo.

The letter that Microsoft sent to Yahoo detailing this offer referred to talks held in late 2006 and early 2007 about ways the companies could work together. But it said Yahoo rejected the idea of a merger in February 2007, saying "now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction."

Microsoft's letter to Yahoo pointed out that "a year has gone by, and the competitive situation has not improved." It pointed out that combined the two companies would be better able to compete with Google for both new search technology and a share of the growing advertising dollars tied to search.

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

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