Yahoo struggles may be good news for Microsoft

In what appears to be a surprise move, Microsoft has laid a purchase offer on the Yahoo table.

In what appears to be a surprise move, Microsoft has laid a purchase offer on the Yahoo table.

On Jan. 31, Yahoo announced that Terry Semel would step down from the Chairman of the Board role that he transitioned to seven and a half months after resigning as CEO. The day before, Yahoo announced that it expects to cut 1,000 jobs and published information about its growth outlook for 2008, warning shareholders that a turn around wasn't expected until 2009.

From the NY Times:

Jerry Yang, the chief executive, warned investors of "head winds" this year. Yahoo's projections for revenue growth and profitability in 2008 were either at the low end of analysts' expectations or below them.

Yahoo executives said those projections were largely independent of the slowdown in the United States economy, noting that it was too early to predict whether weakness in the financial, travel and housing sectors would hurt online advertising.

"There is not a lot of positive about the outlook," said John Aiken, an analyst with Majestic Research, an investment analysis firm in New York.

"Not a lot of positive" may be an understatement. In a conference call on Jan. 29, held after market close, it appeared as if the number two ranked portal didn't have a solid vision for the company's direction. Throughout the call, there were references about what the company wanted to do but no substance about how it would actually do it.

From the NY Times:

The call sounded like a committee of actuaries talking about the results of a mid-tier life insurance company. Sure, Yahoo has problems, but it is still the No. 2 in one of the fastest-moving markets ever. It has half a billion users a month. There's got to be something exciting to talk about.

Instead, Mr. Yang and Ms. Decker's strategy is essentially "vision goes here." They want to be the "starting point" for users on the Web. They want to be the "must buy" for advertisers. And Mr. Yang said he would assume an "aggressive investment posture."

The only thing missing from that is the substance. Why would users start at Yahoo? How are advertisers going to find Yahoo superior? And what will the company invest in?

On Jan. 31, Microsoft laid an offer on the table to purchase Yahoo for $44 billion in cash and shares. This is 62% above Yahoo's closing share price on Thursday.

From BBC America:

Yahoo cut its revenue forecasts earlier this week and said it would have to spend an additional $300m this year trying to revive the company.

It has been struggling in recent years to compete with Google, which has also been a competitor to Microsoft.

"We have great respect for Yahoo, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market," Microsoft chief executive Steve Ballmer said.

You can read the full text of the Microsoft press release and the letter to the Yahoo board.

So, what is the final impact here? It is obviously early days yet, but the acquisition of Yahoo would certainly firmly place Microsoft as a player in the online landscape that Google has dominated for some time. For Microsoft, this would be the expected conclusion to its earlier investigation in 2006 and 2007 to purchase the online portal. The move would position Microsoft to challenge Google's market share. As a consumer of Internet portals, does it matter to you that Microsoft is positioning to become a bigger player?

Update- DOJ and potential hostility

Editor's Picks