- The Washington Times - Saturday, February 2, 2008

Microsoft Corp. yesterday made an unsolicited $44.6 billion bid for struggling Yahoo Inc. as the software giant eyes Google Inc.’s supremacy in online search and advertising.

If approved, the deal would create an Internet behemoth with the benefit of Microsoft’s cash and Yahoo’s history of innovation in what Microsoft Chief Executive Officer Steve Ballmer called “an incredibly efficient and competitive offering for consumers, for advertisers and for publishers.”

Analysts said it’s too early to tell what the transaction could mean for users of Yahoo Mail, Flickr or other Web products from the Sunnyvale, Calif., company.

Video: Microsoft pursues Yahoo takeover

“I would imagine that one of the principles that they would try to follow would be to do as little harm to the users as possible, so I would not expect major, disruptive changes — especially when it comes to things like e-mail domains and well-trafficked Web properties,” said Andrew Frank, a vice president of media research at Gartner Inc.

Mr. Ballmer yesterday deflected questions about branding and how the companies would integrate.

“Certainly Windows Live, Office Live, Yahoo, those are all I think powerful opportunities, powerful brands. Exactly how we relate [Microsoft’s Web portal] MSN and some of those other things … the team from both companies would be best prepared to assess that,” he said in a conference call with reporters and analysts.

News of the takeover offer sent shares of Yahoo soaring 48 percent to $28.38 on the Nasdaq Stock Market as the company promised to “evaluate this proposal carefully and promptly.”

Microsoft’s bid, at $31 a share, represents a 62 percent premium over Yahoo’s closing price Thursday. The deal would be the biggest technology acquisition ever and possibly both companies’ best effort at taking back market share from Mountain View, Calif.-based Google.

The move comes one year after the Redmond, Wash., maker of the Windows operating system was rebuffed in a previous offer by then-Yahoo Chairman and Chief Executive Officer Terry Semel. In its February 2007 response to Microsoft, Yahoo said it hoped to lift its sagging share price through a reorganization.

“A year has gone by, and the competitive situation has not improved,” Mr. Ballmer said in his letter to Yahoo directors late Thursday. Microsoft announced its offer yesterday morning.

Mr. Semel, who shed his role as CEO in June, stepped down as Yahoo chairman Thursday night.

Just this week, Yahoo said its fourth-quarter profit sank 23 percent and new CEO Jerry Yang said the company would lay off 1,000 of its 14,300 employees. Shares of Yahoo have slumped 18 percent this year.

Both Yahoo and Microsoft have watched their slice of the U.S. search market shrink as Google has come to control nearly 60 percent, according to Gartner research. Yahoo is a distant second with 22.9 percent of the market; Microsoft controls 9.8 percent of it.

Microsoft cited $1 billion in cost savings if the acquisition is approved.

“The real challenge isn’t going to be getting this deal done, it’s really going to be a question of what happens after the deal is done and the ramifications up and down,” said Michael Gartenberg, an analyst with Jupiter Research.

Mr. Gartenberg described the takeover bid as “Murdoch-esque,” referring to media mogul Rupert Murdoch’s unsolicited $5 billion offer for Dow Jones & Co. last year.

“If I’m Google, obviously I’m watching the situation, but on the other hand, I’m going, ‘Boy, these guys have quite a lot of time to figure out how this is going to work,’ ” he added.

The deal is the latest example of technology giants attempting to increase market share in one category while expand into others. Google recently won federal approval in its $3.1 billion acquisition of advertising firm DoubleClick, while Microsoft last spring purchased digital advertising company AQuantative for $6 billion and Tellme Networks, a speech-based mobile search company, for a rumored price of $800 million.

Locally, the deal is sure to have an impact on AOL, which is realigning its business from Web access to advertising. The Sterling, Va., company’s AOL.com portal competes with MSN.com in multimedia services as well as e-mail and instant messaging.

Google might be the leader in search-based online advertising today, but Mr. Frank of Gartner noted that “there’s certainly a lot of growth ahead in the advertising world.”

“The fact that advertising and marketing are increasingly going digital — I think Microsoft and Google are both trying to make inroads into those higher-level marketing functions.”

Shares of Microsoft yesterday closed down nearly 7 percent at $30.45 on the Nasdaq, signaling that investors might think the $31-per-share takeover target is too high.

Standard & Poor’s Corp. placed Yahoo debt on credit watch in response to the news. The rating agency cited concerns that Yahoo would reject the offer and try to pacify shareholders through a one-time dividend or a large-scale share repurchase funded by debt.

“Microsoft is clearly willing to be quite aggressive and pay up for the asset,” said George Askew, an analyst with Stifel Nicolaus & Co. Inc. Mr. Askew estimates the likelihood of a deal at 80 percent.

Microsoft said it expects to receive antitrust and regulatory approvals and close the acquisition in the second half of this year.

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