Breaking: Microsoft Offers $44.6 Billion for Yahoo

Microsoft YahooThe rumors of this kind of deal have been around for a while but never seemed to materialize. Microsoft will hold a conference call to discuss the details of the proposal, though CEO Steve Ballmer has already laid it out pretty clearly in his public letter to Yahoo (see below for full text). One aspect of the letter to note:

“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.”

In other words, Microsoft is not interested in taking no for an answer. At the same time, though, some wonder if Yahoo could draw this out and get other bids. But it’s hard to think of another company/offer than can compare. Microsoft is actually being fairly generous with its offer valuing Yahoo at a 62% premium. And not many companies have these kind of resources or interests. In short, one way or another, look for Yahoo to be a part of Microsoft this year.

For more sources and coverage, see Techmeme.

*Update* Rumors/reports are coming in of other companies (such as MySpace parent News Corp.) scrambling to make a bid for Yahoo. But again, the likelihood of another company outbidding Microsoft (and having their shareholders agree to it) is fairly low.

January 31, 2008

Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089
Attention: Roy Bostock, Chairman
Attention: Jerry Yang, Chief Executive Officer

Dear Members of the Board:

I am writing on behalf of the Board of Directors of Microsoft to make a proposal for a business combination of Microsoft and Yahoo!. Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft’s closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock. Microsoft would provide each Yahoo! shareholder with the ability to choose whether to receive the consideration in cash or Microsoft common stock, subject to pro-ration so that in the aggregate one-half of the Yahoo! common shares will be exchanged for shares of Microsoft common stock and one-half of the Yahoo! common shares will be converted into the right to receive cash. Our proposal is not subject to any financing condition.

Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008. The implied premium for the operating assets of the company clearly is considerably greater when adjusted for the minority, non-controlled assets and cash. By whatever financial measure you use – EBITDA, free cash flow, operating cash flow, net income, or analyst target prices – this proposal represents a compelling value realization event for your shareholders.

We believe that Microsoft common stock represents a very attractive investment opportunity for Yahoo!’s shareholders. Microsoft has generated revenue growth of 15%, earnings growth of 26%, and a return on equity of 35% on average for the last three years. Microsoft’s share price has generated shareholder returns of 8% during the last one year period and 28% during the last three year period, significantly outperforming the S&P 500. It is our view that Microsoft has significant potential upside given the continued solid growth in our core businesses, the recent launch of Windows Vista, and other strategic initiatives.

Microsoft’s consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers. In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. 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.

In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that “now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.” According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the “potential upside” if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.

While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:

Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.

Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.

Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.

Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.

We would value the opportunity to further discuss with you how to optimize the integration of our respective businesses to create a leading global technology company with exceptional display and search advertising capabilities. You should also be aware that we intend to offer significant retention packages to your engineers, key leaders and employees across all disciplines.

We have dedicated considerable time and resources to an analysis of a potential transaction and are confident that the combination will receive all necessary regulatory approvals. We look forward to discussing this with you, and both our internal legal team and outside counsel are available to meet with your counsel at their earliest convenience.

Our proposal is subject to the negotiation of a definitive merger agreement and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of Microsoft common stock, we would provide Yahoo! the opportunity to conduct appropriate limited due diligence with respect to Microsoft. We are prepared to deliver a draft merger agreement to you and begin discussions immediately.

In light of the significance of this proposal to your shareholders and ours, as well as the potential for selective disclosures, our intention is to publicly release the text of this letter tomorrow morning.

Due to the importance of these discussions and the value represented by our proposal, we expect the Yahoo! Board to engage in a full review of our proposal. My leadership team and I would be happy to make ourselves available to meet with you and your Board at your earliest convenience. 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.

We believe this proposal represents a unique opportunity to create significant value for Yahoo!’s shareholders and employees, and the combined company will be better positioned to provide an enhanced value proposition to users and advertisers. We hope that you and your Board share our enthusiasm, and we look forward to a prompt and favorable reply.

Sincerely yours,

/s/ Steven A. Ballmer

Steven A. Ballmer

Chief Executive Officer

Microsoft Corporation

  • Paul Ellis

    You know, I don’t know what I think about this. It has been in the rumor mill so long that it didn’t seem like it would happen. How will they sort out the substantial overlap between MSN and Yahoo? I know everyone thinks that Google is so big and powerful that they can’t be toppled, but if any company can it is Microsoft. Maybe this Yahoo acquisition help them do that.

  • Good point, Paul. Not sure how the branding problem will be worked out… Although, Microsoft has probably learned a thing or two after their own issues with Live/MSN. Whatever the case, this will be very interesting and fun to watch!

  • Paul Ellis

    After looking at these two links, I am actually a lot more confident that this could work out well, and is well timed for Microsoft. So many properties won’t be that bad to integrate (maps, email, IM, games, personal homepage, widgets, pipes/popfly, advertising). In fact you can already cross network message between Yahoo and Microsoft. Some products might not get touched much (Flickr, delicious), and some will get axed (who uses Yahoo 360?).

  • I thought I’d cross post my response to the kind of rhetoric I found here via here. To give some background, this is what I’m responding to:

    “Personally, I think the Microsoft and Yahoo matchup is like two tired swimmers who bump into each other and then wind up drowning each other in their scramble to survive. But Yahoo will be the first to go under in this embrace.

    Just smells like this decades AOL/Time matchup. It will go through. Microsoft will remove one competitor, but it won’t work. It won’t be enough to stop the future.”

    And my response:

    My only issue with this is that it is ultra-simplistic and limited in scope. Basically:

    “AOL/Time didn’t work out like they hoped, and this is similar.”

    That’s it? One example of a failure is enough to doom this deal? What about the fact, that, statistically speaking, Wall Street thrives on Mergers and Acquisitions?

    This isn’t the first time two big companies have decided to join forces, and it won’t be the last. And the outcome is often very positive (or else no one would do it) even if the failures get most the press.

    I’m just saying that most of the “this won’t work” commentary is backed by little more than the “they’re two big companies with different cultures and overlapping products” excuse.

    But you could say that about any big company X merging with company Y. Bottom line: if there is limited correlation between the variable of “failures” and the variable of “big company mergers,” well, I’m going to need to see a different variable as the scapegoat of this supposed failure before I believe any “can’t stop the future” rhetoric (what does that even mean, btw?).

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