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

Microsoft antitrust, possible hostile take over

February 1 saw the announcement of a bid by Microsoft to purchase Yahoo for $44.6 billion. This effort would position Microsoft to compete directly with search firm Google for the first time. It would also combine the numbers two and three players in the search category, potentially out-stripping Google right out of the gate.

But there may be some small issues to overcome. On Jan. 29, a federal judge extended the duration of sanctions imposed on Microsoft by a 2002 consent decree agreement until November 2009. Those sanctions were originally due to expire in December.

From Ars Technica:

According to Judge Colleen Kollar-Kotelly, Microsoft failed to provide protocol specification documents to competitors as required by the consent decree agreement. The protocol documentation, which was supposed to be made available by February 2003, still hasn’t been fully published by Microsoft.

Last year, the attorneys general of several states led by California authored a report in which they argued that Microsoft’s continued dominance of the operating system market should be viewed as an indication that the constraints imposed by consent decree agreement failed to normalize competition. They called for a five year extension of the sanctions.

Given that there are current Department of Justice concerns over Microsoft’s activities, it comes as no surprise that the DOJ is interested in reviewing this possible merger for antitrust issues. Analysts expect other enforcement agencies, including the European Union, will soon follow suit.

Of course, this news has also had an impact on the market. Yahoo shares jumped 46% to $27.98 but haven’t topped $31, which indicates that the market doesn’t expect a higher competing bid. Microsoft tumbled slightly to $30.75, down 5.7%, and Google is trading 8.6% lower at $515.89.

The thing that seems to be somewhat overlooked in all this is that Yahoo has yet to agree to the Microsoft overture. What appears to be an easy win for Microsoft could be refused by Yahoo. All Yahoo has said so far is that they would “evaluate the offer.”

But industry analysts are questioning if Microsoft will make a bolder offer — or a hostile one. Calling the letter to Yahoo a “bear-hug letter,” some analysts are wondering out loud if certain phrasing is indicative that Microsoft is willing to turn the take-over hostile.

From The New York Times:

Microsoft states in its letter that:

Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.

So, what is Microsoft really getting at? What is the “bear” here?

Yahoo has a shareholders rights plan, also known as a poison pill, with a 15 percent trigger. As a result, Microsoft cannot effectively acquire an interest in Yahoo above that threshold unless it obtains prior approval from Yahoo’s board.

But if the Yahoo board resists Microsoft’s offer, Microsoft can still pursue a hostile bid.

In the face of an unaccommodating board, the only effective option for Microsoft to force Yahoo’s directors to come to the negotiating table or to otherwise acquire Yahoo is a proxy contest.

Here, the timing of Microsoft’s letter is not random. Section 2.5 of Yahoo’s by-laws require that:

For proposals and nominations to be timely, a stockholder’s notice shall be received by the secretary at the principal executive offices of the Corporation in the case of the annual meeting not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting of stockholders.

Yahoo’s last annual meeting was on June 12, 2007. By my count, the notice date period therefore begins on Feb. 13, 2008, and ends March 14, 2008.

If correct, this analysis could indicate that Microsoft is willing to do quite a bit to ensure that Yahoo becomes a Microsoft “partner.”

According to Bloomberg, this purchase will be the largest acquisition ever in the technology industry. It will certainly have the effect of rocking some boats. But the real question to all of us, the Internet consumers, is “Do you want to Mahoo?”


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