Yahoo! Officially in Play

After failing to get the company's approval for purchase over the past year in closed talks, Microsoft. Corp. issued an unsolicited takeover bid of Internet search giant Yahoo! Inc. for $44.6 billion. This comes after a very positive quarter for Microsoft and a disappointing term for Yahoo!

Focal Points

• The $44.6 billion bid for Yahoo! by Microsoft was a premium of more than 60 percent over the company's recent share price. Yahoo! has suffered from disappointing revenues and significant staff turnover over the last few years as Google Inc. has continued to outpace its largest competitors with new advancements. Microsoft claims that the merged entity could save at least $1 billion in operational costs and would be far better able to compete against Google's strength by leveraging best-of-breed products, Yahoo's brand awareness, and Microsoft's marketing and financial muscle. Yahoo! had previously been offered up to $50 billion by Microsoft for the purchase over the past 12 months.
• Both Microsoft and Yahoo! have had Google take significant bites out of their online businesses. Yahoo's ad sales have tumbled more than the company expected, and it just announced that it will lay off 1,000 workers after seeing a 23 percent drop off in quarterly profit. Fourth quarter sales rose to $1.83 billion from the previous year's $1.7 billion, though net income on a GAAP basis tumbled from $268.7 million to $205.7 million. For the year, revenues rose to $6.97 billion – an eight percent gain over 2006's $6.43 billion. Net income dropped to $660 million compared with the $751 million earned in the prior year.
• The proposed takeover is the largest Internet-related merger since 2001's America Online Inc. and Time Warner Inc. deal. Should the proposal receive shareholder approval, the integration would attempt to pull Yahoo's 14,300 employees into Microsoft's fold of 80,000 individuals. Microsoft has recently improved its ad-serving engines to better compete with Google, and has had a good year on that front. Yahoo's Internet search engine is generally regarded as being more user friendly, widely used, and powerful than Microsoft's MSN competitor. Microsoft is coming off of a positive quarter as sales of Windows Vista and Office 2007 have been on the rise.

Experton Group believes a Microsoft/Yahoo! merger makes a great deal of sense given the abundance of both overlapping and complementary product sets. Yahoo! has a fantastic Internet presence and is one of the best-known and respected online consumer brands. The company has been severely hurt as of late because of its poor ability to effectively plan its business growth, grow its user base, and market itself in virtually every sense. Despite Microsoft's significant recent investments in its consumer-oriented online services and beefing up its Internet search capabilities, the company still lags far behind Yahoo! in these regards. Microsoft clearly hopes to combine the two sets of complementary offerings into best-of-breed alternatives, and will likely use the Yahoo! brand as the leverage point towards building a larger online, consumer-oriented presence. Moreover, Microsoft would eliminate one of its largest ad-sales competitors, and the sheer presence of the combined size and capability in this market could pose a very real threat to Google. Granted, Microsoft would be challenged to keep Yahoo's top talent from fleeing the merged company and may have some challenges in integrating the geographically dispersed entities. With Yahoo's shareholders very concerned about competition, growth, and profit issues, Experton Group believes this merger will very likely receive regulatory board approvals. IT executives should expect for both Microsoft and Yahoo! to improve their product offerings and financial strength as a result of the merger, and for enterprise search and the Internet-connected search capabilities of Microsoft products to improve.