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Microsoft Offers $44.6 Billion For Yahoo

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By PETER WHORISKEY and DAVID CHO, The Washington Post

Published: February 2, 2008

WASHINGTON - In a bid to halt Google's growing dominance online, Microsoft has offered to buy struggling Internet giant Yahoo for $44.6 billion, an acquisition that would unite the world's most influential software company with the Web's most-trafficked site.

If approved by Yahoo and by regulators, Microsoft's unsolicited offer would set up a titanic corporate struggle between Microsoft and Google for the patronage of millions of Internet users around the world.

Microsoft sells the operating systems and Web browser used on the vast majority of the world's computers. It was once feared as a near-monopoly with unbounded power over personal computing.

But the proposed deal tacitly acknowledges that the software giant has failed to reinvent itself as computing shifts more online; instead it is trying to buy its way into a stronger position.

The proposed acquisition would give Microsoft access to Yahoo's 137 million monthly visitors and long reach into the lives of consumers in the online realm.

There it would confront Google, which through its preeminent search engine now captures the biggest share of online-advertising money. It is also branching out in many directions at once, into office software, mobile phones and, through its purchase of YouTube, entertainment.

"The market is increasingly dominated by one player," said Kevin Johnson, a Microsoft divisional president, referring to Google. "By combining assets of Microsoft and Yahoo, we can offer a more competitive choice for consumers, advertisers and publishers."

Yahoo To Think About It

Yahoo said it would evaluate the offer "carefully and promptly in the context of Yahoo's strategic plans." Increasingly, the machines owned by consumers - desktops, laptops, mobile phones - are valued less for their computing power than for their connections to online media.

Microsoft, a creation of the previous era, has struggled to adapt to the online shift, though it recognizes its importance.

In announcing its bid Friday, Microsoft executives estimated that the online advertising market - $40 billion in 2007 - will double in size by 2010.

A Reflection Of Previous Efforts

Matt Rosoff, an analyst at Directions on Microsoft, an independent research firm that focuses exclusively on the company, said he viewed the bid as a reflection on the company's previous attempts to go online with MSN and other services.

"I think that's a tacit admission of failure" in online services, Rosoff said. "They've poured a lot of money into it and tons of resources and they've basically said, 'Well, we can't do it on our own.'"

Google, meanwhile, has excelled online, where it was born as a search engine designed by Stanford University graduate students.

Its lofty and oft-stated goal is to "organize the world's information," but its financial success comes from capturing as much as 40 percent of online ad sales, according to analysts.

Most of Google's ad money comes from ads related to searches, in which companies pay for messages to be presented with the results for specified search terms.

Google's search engine has - and provides side-by-side ads for - 62 percent of the world search market, according to ComScore, a marketing-research company. Yahoo's search, its closest competitor, has 13 percent and Microsoft has 3 percent.

With immense profits from its search engine, Google has recently entered fields that directly threaten Microsoft's core business. For example, a considerable portion of Microsoft's revenue comes from sales of word-processing and spreadsheet software. Google now offers free online word processing and spreadsheets.

Such threats from Google propelled - almost forced - Microsoft to counter its rival, analysts said.

"This is a shotgun wedding and Google is holding the shotgun," said Kevin Ryan, vice president of Search Engine Watch and Search Engine Strategies.

Asked why a deal for Yahoo is being proposed now, Microsoft chief executive Steven Ballmer obliquely cited Google's gathering market power.

"We had discussions a year ago and they didn't conclude in anything," Ballmer said. Since then, "the position of the market leader has gotten stronger."

Whether the proposed union would work is open to questions regarding both its legality and effectiveness.

What Would The FTC Say?

First, the offer must be accepted by Yahoo's shareholders. Yahoo co-founder chief executive Jerry Yang has reportedly resisted selling, but the offer of $31 a share - when Thursday's closing price was below $20 - is likely to be attractive to the company's shareholders.

In Microsoft's offer letter, Ballmer noted that Yahoo resisted his previous overtures because executives hoped that initiatives such as improving the Yahoo search engine would better the company's standing.

But "a year has gone by, and the competitive situation has not improved," Ballmer wrote.

Microsoft warned in its letter to Yahoo that its offer could turn hostile if Yahoo rejects the bid.

Ballmer called Yang on Friday night to discuss the proposal. Ballmer was reluctant to discuss the conversation in detail. The proposed deal got its first reviews Friday from Wall Street.

Yahoo shares rose $9.20, to $28.38 - reflecting investor belief that the deal will go through at $31 a share. Microsoft shares fell $2.15, to $30.45. Google closed at $515.90 a share, down $48.40.

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