Microsoft Offers to Buy Yahoo for $44.6 Billion (Update11)

By Ari Levy and Dina Bass


Feb. 1 (Bloomberg) -- Microsoft Corp., the world's biggest software maker, made an unsolicited $44.6 billion offer for Yahoo! Inc. to challenge Google Inc.'s dominance in Internet search services and advertising.

The $31-a-share bid of cash or Microsoft stock is 62 percent more than Yahoo's closing price yesterday. Yahoo, which posted a 23 percent drop in fourth-quarter profit this week, had fallen 18 percent in Nasdaq Stock Market trading this year before today. Microsoft fell the most since 2006 as investors expressed disapproval of the deal.

Microsoft Chief Executive Officer Steve Ballmer is attempting the biggest-ever technology takeover after failing to compete with Google in a market that may almost double to $80 billion by 2010. Microsoft's shares have dropped more than 40 percent since Ballmer took over from co-founder Bill Gates in 2000.

``With Microsoft paying a full price for a broken business where there's not accelerating organic growth, I can't make that work at all,'' said Jon Fisher, a Minneapolis-based portfolio manager at Fifth Third Asset Management, which manages $22 billion, including Microsoft shares. ``I don't see what they get out of it. The strategy behind the deal was wrong.''

Yahoo rose $9.20, or 48 percent, to $28.38 at 4 p.m. in Nasdaq trading. Microsoft, based in Redmond, Washington, fell 6.6 percent, while Google dropped 8.6 percent. The volume of Microsoft shares traded rose to the highest since April 2006, while Yahoo share trading reached a record.

Cost Savings

The combination may save $1 billion a year, partly ``through elimination of redundant cost,'' Microsoft said today in a statement. The company has almost 80,000 employees to Yahoo's 14,000. This week, Yahoo announced plans to cut 1,000 jobs, or about 7.1 percent of the workforce.

Yahoo, based in Sunnyvale, California, said today that it plans to evaluate the proposal ``promptly.''

``This is kind of a gift from heaven for the Yahoo shareholders who have really been suffering for the last couple years,'' said Georges Yared, chief investment strategist for Yared Investment Research in Wayzata, Minnesota. ``This allows the shareholders to be bailed out.''

Yahoo's inability to crack Google's dominance in search has led to eight straight quarters of declining profit and a stock that, before today, had lost half its value in the past two years.

Previous Overtures

Microsoft and Yahoo explored ways to work together in late 2006 and early 2007, according to a letter Ballmer, 51, sent to the Yahoo board. Yahoo rejected the idea of being taken over by Microsoft a year ago, the letter said.

``It shows how serious the threat is from Google,'' Jordan Rohan, an analyst at RBC Capital Markets in New York, said in an interview. ``Yahoo is vulnerable. Investors are losing patience with the Yahoo management team.'' The New York-based analyst rates the stock ``outperform.''

Google yesterday reported a 52 percent increase in fourth- quarter sales growth, its 14th straight quarter exceeding 50 percent. Still, profit and revenue trailed analysts' estimates as it received less money than expected from ad deals with social-networking sites like News Corp.'s MySpace.

Google has grown faster than Microsoft in every quarter since Google's 2004 initial public offering as its search engine won more users. Despite Ballmer's multiyear effort to build a new search engine from scratch, Google outsold Microsoft in Internet ads by a margin of 7-to-1 in Microsoft's most recent fiscal year.

`Massive Pressure'

Ballmer has escalated spending on acquisitions in the past 12 months after years of investments in Microsoft's own business failed to help the company gain share.

``Microsoft is under massive pressure to expand its Internet business to fend off competition from rivals such as Google, and this deal shows how desperate they are,'' said Thomas Radinger, a fund manager at Pioneer Investments in Munich, which oversees about $95 billion in assets, including Microsoft shares. ``It's a huge gamble as the price is very steep and it will take years to successfully integrate such a massive acquisition.''

Prior to August's $6 billion purchase of Internet ad firm AQuantive Inc., the company had never spent more than $1.5 billion for an acquisition. The Yahoo bid is more than 7 times what Microsoft spent for AQuantive. Microsoft paid 13.6 times sales and 111.2 times profit for AQuantive, compared with its offer of 6.4 times sales and 67.6 times earnings for Yahoo.

Microsoft's Cash

Microsoft, which had $21.1 billion in cash as of Dec. 31, doesn't disclose the value of many of its smaller deals. The company has officially announced deals worth at least $7.5 billion since the start of 2005. That compares with the $33 billion that Oracle Corp. will have spent in that time, pending the closure of its takeover of BEA Systems Inc.

Yahoo holders can choose to take $31 in cash or 0.9509 of a Microsoft share for each Yahoo share, according to the statement. Microsoft plans to pay for half the purchase with cash and half with stock.

The U.S. Justice Department is ``interested'' in reviewing the antitrust implications of the deal, said agency spokeswoman Gina Talamona.

Neelie Kroes, commissioner of competition for the European Commission, said her agency also would scrutinize a Microsoft- Yahoo deal.

Too Early to Tell

``It's a part of my job,'' she said in an interview at a conference in San Francisco. Kroes said it was ``far too early'' to say what aspects of a potential deal the agency would examine.

Even combined, Microsoft and Yahoo wouldn't seize the lead in Internet search. Google, based in Mountain View, California, captured 56 percent of U.S. Web queries in December, almost double the combined share for Yahoo and Microsoft, which attracted 18 percent and 13 percent, according to New York-based Nielsen Online.

Searches will account for 37 percent of the $27.5 billion U.S. online advertising market in 2008, estimates research firm EMarketer Inc.

Yahoo also has lost sales in the market for graphical, or display, ads to social-networking sites like Facebook Inc. and MySpace. Co-founder Jerry Yang replaced Terry Semel as chief executive officer in June to reignite sales growth. Microsoft increased competition with Google by agreeing to buy a 1.6 percent stake in Facebook, the second-most visited social- networking site.

Asia Holdings

Before today's stock gain, about half of Yahoo's market value came from its investments in China's Alibaba Group and Alibaba.com, Yahoo Japan, and South Korea's Gmarket Inc. The company said this week that the value of those investments was more than $10 a share in the latest quarter.

Microsoft was advised by Morgan Stanley and Blackstone Group LP and the law firms of Simpson Thacher & Bartlett LLP and Cadwalader Wickersham & Taft LLP.

Yahoo hasn't disclosed its bankers. Goldman Sachs Group Inc. is advising Yahoo, Reuters reported, citing people familiar with the situation. Goldman spokesman Michael DuVally declined to comment. Skadden, Arps, Slate, Meagher, & Flom LLP is giving Yahoo legal counsel, the firm said.

``When you combine the strengths of our two companies, the result will be an incredibly efficient and competitive offering for consumers, for advertisers and for publishers,'' Ballmer said on a conference call today. ``We believe now in those benefits more than ever.''

Stanford Roots

Yahoo was founded by Yang, 39, and David Filo while the two were graduate students at Stanford University in 1995. The co- founders, who own a combined 9.8 percent of Yahoo's stock, took the company public a year later. After a three-year jump in the stock price, they were each worth $4 billion, according to Forbes magazine. Then the market crashed in 2000, wiping out 86 percent of Yahoo's market value.

The purchase would be the largest acquisition ever in the technology industry. There have been bigger media and telecommunications deals. America Online Inc. in 2001 bought Time Warner Inc. for $124 billion to create the largest Internet and media company. In 2000, Vodafone Plc of the U.K. paid $175 billion for Mannesmann AG, Germany's biggest mobile-phone company.

Microsoft's acquisition pace picked up after Google agreed to buy DoubleClick Inc., an AQuantive rival, for $3.1 billion. Microsoft opposed the DoubleClick acquisition, claiming it would give Google too much control over the online ad market. The deal is under review by European regulators.

Microsoft's bid to challenge Google in online ads results from slowing growth in the computer software market. Microsoft also faces challenges in that business from Google, which now offers applications for word processing, spreadsheets and presentations over the Web.