Microsoft Bids $44.6 Billion for Yahoo!
Unless you were Punxsutawney Phil, the groundhog that saw its shadow only to leave us with six more weeks of winter, you probably heard about Microsoft's Friday-morning bid to acquire Yahoo! for what was, at the time, $44.6 billion in cash and stock. At $31 dollars a share, the bid was a 62 percent premium to Yahoo!'s closing share price on Thursday. Since then, as Microsoft's stock has retreated somewhat, the value of the offer has dropped a bit, but if Microsoft and Yahoo! do eventually merge, the combined entity would control 30 percent of the search-based advertising market, giving them a stronger foothold to compete against the industry's real 800-pound groundhog, Google.
"Neither [Microsoft or Yahoo!] can compete [with Google] on search monetization," says John Byrne, an analyst at Technology Business Research (TBR). "It doesn't look like 2008 is going to be any better for either one of them," he adds. "They've both done a lot of acquisitions to improve their ad platform[s] but it's not being reflected in their results." Google has become the obvious leader in the search-advertising space with AdWords and AdSense, and while Yahoo! is still considered the leader in banner advertising, Google's $3.1 billion acquisition of DoubleClick last year is expected to help Google to conquer this space as well. What the Microsoft-Yahoo! deal comes down to, Byrne says, is a fight for survival in the online advertising space.
Although Yahoo! was bouncing around its 52-week low before Microsoft's offer, Byrne says that the final price will likely be even higher than the current offering, since the current bid is still below Yahoo!'s 52-week high of $34.08, which the Sunnydale, Calif.-based firm hit just a few months ago. Regardless of the eventual price tag, Byrne says the acquisition has a high degree of certainty -- it's just a question of when. Still, Yahoo! has indicated its reluctance to give in by refusing to accept the offer outright; and has taken strides over the last year to right its course independently, bringing back cofounder Jerry Yang as chief executive officer just six months ago. "It's hard for me to envision [Yang], after 6 months of coming back, just throwing in the towel," Byrne says. On the other hand, he adds, having just announced layoffs of 1,000 employees, Yahoo! will be facing extreme pressure from investors wary of the company's financial future. Investors, he says, "will probably play a tug-of-war with the company."
With stronger competition, experts see a different response that may in fact be beneficial to the growth of online advertising. "We're concerned that Google may not be innovating as fast as they should because they've got such a large lead on all the other players," says Martin Laetsch, senior director of search strategy at Covario, an interactive marketing analytics company. "[The Microsoft-Yahoo! integration] could be very good because it gives Google a very strong second competitor," he adds. Nevertheless, if and when the acquisition does occur, the integration and cleansing of any program redundancies could take at least a year to sort through, according to Laetsch. During that time, Google will undoubtedly feel pressure to innovate faster and improve overall search capabilities in the market.
Google released a statement early Sunday morning, calling the situation a "hostile bid" that intrudes on the "openness" and "innovation" that is the foundation of the Internet. The positions expressed in the statement struck some observers as rather hypocritical, or at least ironic, given that Google has often been accused of being the Microsoft of the online world. In its statement, Google outlined fears that Microsoft's history of monopolization on the personal computer will impede growth and competition online. With Yahoo!, the two companies will own a large share of the industry's instant message and email accounts. Ironically, Google's plea to policymakers sounds vaguely familiar to the one Microsoft made when Google acquired DoubleClick. The "biggest losers," according to Covario's Laetsch, will be Ask.com and ValueClick, given that their offerings will be considered "redundancies."
To Laetsch, the acquisition will bring positive advancement to the market place. "Microsoft and Yahoo! will combine their technologies, become a more-effective advertising platform," he says. "With that, I think it will give visibility into the effectiveness of online advertising." As a result, more companies will realize the benefits that online advertising offers beyond those of traditional media methods. That would bode well for companies such as Covario -- firms with the ability to measure return on investment from these digital campaigns. Moreover, Laetsch anticipates that advertisers will continue to look for new ways to invest their online marketing spend, and the consumer will benefit by having a stronger destination for more-effective information.
While online advertising only consists of a small portion of Microsoft's spend, the acquisition of Yahoo! will contribute to the software company's development in various other spaces. According to Allan Krans, another TBR analyst, Microsoft is heavily investing in the online world, with hosted CRM systems, an Internet-enabled platform for Windows and Office users, and online interaction for users of the company's Xbox gaming console. "Microsoft's initiative to transition from a desktop-centric software model to an Internet-enabled model could be the driver the justifies the transaction," Krans says.
The impact on other software vendors -- such as IBM, SAP, and Oracle -- seem to be small, if not negligible. "The primary focus of Microsoft's bid for Yahoo! is on Internet advertising, which is not a source of revenue for IBM, SAP, or Oracle," Krans says. "In fact, the acquisition of Yahoo! could be an opportunity for these three vendors to make advancements on Microsoft as it works through the arduous task of integrating such a large acquisition."
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