Microsoft Stuns Yahoo! With $44.6 Billion Takeover Offer

By Jason Simpkins
Associate Editor

Microsoft Corp. (MSFT), the world's biggest software maker, has made an unsolicited $44.6 billion bid for search engine Yahoo! Inc. (YHOO).

Microsoft has offered $31 per share in cash or Microsoft stock, a premium of 62% over Yahoo's closing price Thursday. Yahoo stock rose 53% in pre-market trading, after plummeting 18% in January.

Yahoo has struggled to compete with rival Google Inc (GOOG), suffering eight straight quarters of declining profits. Just a few weeks ago, Yahoo posted a 23% decline in fourth-quarter profits. Meanwhile, Google late yesterday (Thursday) reported a 52% increase in fourth quarter sales growth, its 14th straight quarter over 50%.

[However, Google shares dropped 9.6% after the opening bell today because the profits fell short of analyst expectations. Worries about how the slumping U.S. economy might affect Google's earnings power have contributed to a January decline in the company's stock price that approached 20%, The Associated Press reported].

Google drew 56% of U.S. web search traffic in December, nearly double the combined share of Yahoo and Microsoft, which attracted 18% and 13% of the market respectively.

Microsoft and Yahoo considered various avenues of cooperation a year ago, but Yahoo rejected the notion of a takeover. Now, desperate to not let Google run away with the market, Microsoft has made its move.

"A year has gone by, and the competitive situation has not improved," Microsoft Chief Executive Steve Ballmer said in a letter to Yahoo's board.

"While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing," Ballmer wrote.

By offering a fat premium to downtrodden Yahoo! investors at a time when there's little hope of a 2008 turnaround, Ballmer and Microsoft have really tightened the screws on Yahoo!'s top executives – possibly putting them in a position where they can't turn the offer down.

"Microsoft if 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," Thomas Radinger, a fund manager at Pioneer Investments, told Bloomberg News. "It's a huge gamble as the price is very steep and it will take years to successfully integrate such a massive acquisition," he said.

The purchase will be the largest acquisition ever made in the technology industry, exceeding even Kohlberg Kravis Roberts & Co.'s $26 billion buyout of First Data Corp.
Microsoft expects that, in taking over Yahoo, it will benefit from economies of scale in the online advertising market, will gain greater operational efficiency, and will benefit from the pooling of engineering and creative talent.

"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," said Kevin R. Johnson, Microsoft's president of platforms and services.

While analysts are scrutinizing the potential Microsoft/Yahoo! tie-up, they are also debating just what caused Google's fourth-quarter results to come up short.

"There is a lot to scratch my head over about in this [report]," Jackson Securities analyst Brian Bolan told The AP late Thursday. "I might be up all night trying to figure it out."
Google CEO Eric Schmidt rebuffed the notion that the economy undercut Google's growth.

"I am happy to say we have not seen a negative impact from the rumors of a future recession," Schmidt told analysts during a conference call.
Company co-founder and President Sergey Brin told journalists that the company hasn't seen any evidence that the recent turbulence in the U.S. economy or the volatility in the global securities markets is affecting Google's business.

"I think things are going really well," Brin said.

Google said it earned $1.21 billion, or $3.79 per share, during the final three months of 2007. That's a 17% percent improvement over net income of $1.03 billion, or $3.29 per share, reported during the fourth quarter of 2006.

This is the first time that Google's quarterly profit has climbed by less than 25% since the Mountain View-based company went public nearly 3 1/2 years ago.
Fourth-quarter revenue totaled $4.83 billion, a 51% percent improvement over the $3.21 billion reported during the same quarter the year before.

In terms of a statistical measure that's more crucial to investors, Google retained $3.39 billion in revenue after paying fees to the thousands of Web sites in the online advertising network that fuels its profits. That net revenue figure missed analyst estimates by about $60 million.

Total paid clicks in the fourth quarter rose 30% from the same period in 2006. In the first three quarters of 2007, Google's paid clicks were rising at a clip of 45% to 52%.

For all of 2007, Google earned $4.2 billion, or $13.29 per share, a 37% improvement over $3.08 billion, or $9.94 per share, in 2006. Revenue in 2007 totaled $16.59 billion, a 56% increase from the $10.6 billion reported for all of 2006.

Google shares were trading at $514.97 at 11:30 a.m. today. Over the last 52-weeks, Google's stock has traded as high as $747.24, and as low as $437. The shares were down 31% from that high-water mark.

News and Related Story Links:

  • The Associated Press:
    Google's 4Q Earnings Miss Raises Worries.
    Google Shares Slip After Earnings Miss.