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Microsoft bids for yahoo, as google's business shows

Sunday, 10 February 2008


Robert Weisman
Microsoft Corp. made a well-timed move to check Internet search goliath Google Inc. in the multibillion-dollar online advertising market yesterday, offering an unsolicited $44.6 billion bid to buy Yahoo Inc. and forge one of the biggest technology alliances in history.
But many obstacles remain. Financially weakened Yahoo, which spurned earlier overtures from Microsoft, might turn to another buyer, potentially Google itself, some industry analysts suggested.
Even if the proposed merger goes through, it could prove challenging to integrate two very different corporate cultures - Microsoft's more deliberate computer software culture and Yahoo's faster-moving Internet culture - and create a powerful online consumer experience, in everything from e-mail and search to finance and shopping, that combines the strengths of both companies.
"It's going to be a really, really messy merger, especially for users," said Charlene Li, technology analyst for Forrester Research in Foster City, Calif. "On paper it makes sense. But if you use Microsoft's Hotmail or Yahoo Mail or a My Yahoo page, you'll wonder what's going to happen to your favorite things. People don't like change." Li said attempting to consolidate services offered by the two company could wind up driving customers away.
The cash-and-stock offer of $31 a share represents a 62 per cent premium over Yahoo's closing stock price of $19.18 on Thursday, putting pressure on Yahoo to accept the deal or find a better alternative. Rejecting the deal could also prompt a hostile takeover battle.
Yahoo released a statement promising its directors "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." A spokesman for Yahoo, based in Sunnyvale, Calif., said its executives would not elaborate.
Launched by Stanford University students Jerry Yang and David Filo working out of a trailer in 1994, Yahoo was a pioneer in the Internet portal business, which sought to create robust consumer guides online.
But as advertisers have followed the consumer stampede to the Internet in recent years, both Microsoft and Yahoo have been playing catch-up to Google, which has used its market-leading search engine to match consumers and advertisers through ads tied to key word searches and placed on its search result pages. The value of the online advertising market was $40 billion last year, with Google grabbing the lion's share, and the market is projected to nearly double by 2010, according to Microsoft's estimates.
Microsoft has responded with new online offerings, called Live Services, an initiative led by its chief software architect Ray Ozzie, who was recruited from Massachusetts.
But so far these new Internet consumer services, which include search and instant messaging, have failed to make substantial dents in Google's advertising base, analysts said. In addition, they said, the offerings have at times conflicted with the company's MSN consumer businesses and confused consumers.
Google's share of overall search queries, which are key to driving users to its advertisements, was 58.4 per cent last month, compared to a 22.9 per cent share for Yahoo and a 9.8 per cent share for Microsoft, the market research firm comScore Inc. reported.
"Microsoft's efforts to migrate from a packaged software company to an online business have not been successful to date," said Ned May, lead analyst for research firm Outsell Inc. in Boston. "So now Microsoft is trying to tap into Yahoo's traffic and community. And the price today is a bargain because Yahoo's stock is down."
Shares of Yahoo vaulted 47.97 per cent to $28.38, a gain of $9.20, in Nasdaq composite trading yesterday. Microsoft shares on the Nasdaq, meanwhile, retreated $2.15, or 6.6 per cent, to $30.45. News of the takeover offer, a signal the acquisition business may be reheating, helped push the Dow Jones industrial average up 92.83 points to 12,743.19, a gain of 0.73 per cent for the day.
In a Microsoft conference call yesterday morning, Steven A. Ballmer, chief executive of the Redmond, Wash., software maker, insisted that an acquisition would benefit both companies. "This is a proposal we believe to be a very good deal for Yahoo shareholders and an offer we want them to think about seriously," Ballmer said.
Separately, the company said the merger could save Microsoft $1 billion a year by running the two organizations more efficiently.
The offer came at a strategically smart time for Microsoft, with both Google and Yahoo smarting from recent financial reports.
After posting lower fourth-quarter net income earlier this week, Yahoo said it planned to eliminate 1,000 jobs. But the company still had 133.7 million unique visitors to its website last month, more than Microsoft's 120.2 million, according to Boston research firm Compete Inc. The firm estimates, however, that as many as 96.5 million were visitors to both sites.
If the merger takes place and the companies fail to integrate their sites effectively in overlapping areas like autos, personal finance, and entertainment, some consumers could defect to Google, analysts warned.
At the same time, there are signs Google's own business may be slowing. The company's fourth-quarter profits were below analysts' forecasts, and yesterday the company's shares tumbled $7.05, or 39.7 per cent, on the news of Microsoft's offer for Yahoo. "It would be premature for us to comment at this time," said Matt Furman, a spokesman at Google's headquarters in Mountain View, Calif.
Analysts said Microsoft's bid made it unlikely Yahoo can remain independent, regardless of how it responds in coming days.
"Yahoo is in play," said Forrester's Li. "If they don't accept the Microsoft bid at that premium, there'll be a stockholder revolt."
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