The New York Times is reporting that Microsoft has made an apparently unsolicited offer to buy Yahoo for about $44.6 billion, in a mix of cash and stock. That price values Yahoo at $31 per share, a 62 percent premium over Yahoo’s $19.18 closing price on 31-Jan-08.
The move is clearly aimed at Google, which has continued to cement its dominance even as both Microsoft and Yahoo have invested millions in competing with Google Search and Google’s online advertising programs. According to market research firm comScore, in December 2007 Google handled 58.4 percent of Web searches, with Yahoo in second at 22.9 percent and Microsoft a distant third at 9.8 percent.
The real question is what benefit Microsoft sees to buying Yahoo. In the letter to Yahoo’s board of directors, Microsoft reportedly said that the merger would provide economies of scale and allow combined research and development efforts. But the Internet world doesn’t hinge on economies of scale as do manufacturing industries where being able to buy in larger quantities results in lower per-unit costs. Combined R&D operations don’t seem like a huge win either, unless Microsoft believes that Yahoo has some truly astonishing technology in the works that it can’t duplicate.
On the even more obvious downside, Yahoo and Microsoft have very different corporate cultures that might not meld well, and more importantly, the companies have numerous overlapping services, including search, email, instant messaging, advertising, news, travel, and finance. It’s unclear if there’s any particular benefit to one company owning multiple competing services, and forcing users to switch to a combined service could cause them to jump ship entirely to Google or another site.
As such, it’s hard to see Yahoo wanting to merge with Microsoft from a strategic standpoint. However, from the financial side, Yahoo has been having trouble of late, announcing plans last week to lay off 1,000 employees and giving a 2008 revenue forecast that disappointed Wall Street analysts (and Apple watchers know what punishment comes to a stock’s price when analysts are disappointed!). But Yahoo remains profitable, posting a $660 million profit in 2007.
Still, I remain unconvinced that this is a good idea. And more importantly, it doesn’t seem likely that Yahoo’s board of directors will approve the offer unless they feel that it’s simply too much money to pass up.