Microsoft said on Friday it had offered to buy search engine group Yahoo with a proposal that values the internet group’s equity at $44.6 billion, as the software giant seeks to catch up with arch-rival Google.
If completed, it would be the largest acquisition that Microsoft has made and the biggest internet merger since AOL bought Time Warner for $112 billion in 2000.
The unsolicited cash proposal, with a cash and shares alternative, is pitched at $31 a share, a 62 per cent premium to Yahoo’s closing share price of $19.18 on Thursday. Shares in Yahoo jumped 53 per cent to $29.13 in pre-market trading, while Microsoft was $1.60 lower at $31.
The proposed offer price is below Yahoo’s 52-week high of $34.08 reached last October.
Microsoft signalled that a combination of the two companies would provide stronger competition for Google, the leading internet search engine. It said the proposed combination could generate synergies of $1 billion, and provide significant economies of scale.
Steve Ballmer, Microsoft chief executive, said: “We see this as the next major milestone in the transformation of the company to embrace online services.
“Microsoft and Yahoo are companies that share a vision for online services and the result of a combination will be a company that is more efficient and successful.”
Microsoft has been trying to build market share in online advertising with acquisitions such as the $6 billion purchase of Aquantive last year. The company has stated a goal of being the number two in this market within the next few years.
“They have set a series of very aggressive goals, but overall Microsoft’s online business is floundering and the only way they can grow their business is with a big acquisition like this,” said Ian Maude, analyst at Enders Analysis.
However, Maude was sceptical how much the deal would help Microsoft.
“The main problem is that online advertising is largely driven by search, and Google owns that market. The one thing this deal doesn’t do is fix that problem,” he said.
Microsoft said it had been in on-off talks with Yahoo over the last 18 months about a combination, but had been turned down by Yahoo’s board, which had been hoping to see an improvement in the company’s performance under a new turnaround strategy.
However, in a strongly-worded letter to Yahoo’s board, Ballmer said: “A year has gone by, and the competitive situation has not improved.”
In a short statement in response, Yahoo said its board would “evaluate this proposal carefully and promptly in the context of Yahoo’s strategic plans and pursue the best course of action to maximize long-term value for shareholders.”
Microsoft has struck as Wall Street is growing increasingly disillusioned with Yahoo. The search engine group’s earnings before interest, tax, depreciation and amortisation are projected to fall to 32 per cent of revenue in 2008.
That is sharply down from a margin of 38 per cent in 2007, with Yahoo having promised to improve the situation in 2009.
Yahoo’s shares slid earlier this week after it issued a downbeat outlook for this year reflecting its struggles to revamp its core online services.
The decline took the total fall since October to 45 per cent and pointed to Wall Street’s growing doubts that co-founder Jerry Yang, who stepped into the chief executive chair last year, can revive the fortunes of one of the brightest stars of the internet’s first decade.
Henry Blodget, the former technology analyst writing on his blog, said: “This is a brilliant move by Microsoft — a big premium dangled in front of battered Yahoo shareholders, but a price that would have seemed absurdly low as recently as six months ago. Given Yahoo’s battered stock and low 2008 outlook, we expect the offer will be accepted.”
“This deal looks much more likely to happen this time,” agreed John Delaney, analyst at Ovum. “Yahoo hasn’t made a convincing turnaround, and advertising is in a precarious position in a downturn. Microsoft would provide a safehaven for the company in a worsening economic climate.”
Microsoft said a combination with Yahoo would benefit from economies of scale in the online advertising market.
Other advantages included pooling engineering talent to accelerate innovation, operational efficiencies by stripping out costs, and the ability to seize on emerging opportunities such as video and mobile.
Kevin Johnson, Microsoft’s president of platforms and services, said: “The combined assets and strong services focus of these two companies will enable us to achieve scale economics while reaching R&D critical mass to deliver innovation breakthroughs.”
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