Why Microsoft Targets Yahoo!

Microsoft Corp today announced that it has made a proposal to Yahoo! to acquire all the outstanding shares of Yahoo! common stock for per share consideration of $31 representing a total equity value of approximately $44.6 billion. Microsoft’s proposal would allow the Yahoo! shareholders to elect to receive cash or a fixed number of shares of Microsoft common stock, with the total consideration payable to Yahoo! shareholders consisting of one-half cash and one-half Microsoft common stock. The offer represents a 62 percent premium above the closing price of Yahoo! common stock on Jan. 31, 2008. 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. Yahoo! board is currently reviewing Microsoft unsolicited offer.

This is a surprise move but not so much. The main enemy is clear and common for both companies: it is Google. With this alliance, the new company will combine the software producing strength of Microsoft and the Internet power of Yahoo! Despite some recent efforts, Microsoft has never reached a critical mass in term of search engine and on-line advertising power. In this area, Yahoo! has seen its initial franchise decreased every quarter. Yahoo said last Tuesday that it would cut 1,000 jobs from its 14,300-member work force by mid-February, far more than had been expected.

Google is often the number one choice because advertisers and publishers have no real choice if they want to reach a very large audience or benefit from a very diversified supplier source. Yahoo! has yet to react to Microsoft’s offer, but even if the organizational culture may be different, this merger makes a lot of sense as far as business is concerned. This could also allow Microsoft to put more pressure in Google core on-line business and limit its expansion in the software market.

Related Content: