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Microsoft Unveils $44.6 Billion Bid
For Web Ad, Search Rival Yahoo
By KEVIN J. DELANEY and ANDREW EDWARDS
February 1, 2008 9:38 a.m.

Microsoft Corp. offered $44.6 billion to buy Yahoo Inc., in a bold attempt to dramatically expand its online business and compete more effectively with Google Inc. in services ranging from email to Internet advertising sales.

The offer was made in a letter sent Thursday by Microsoft Chief Executive Steve Ballmer to Yahoo's board of directors. One person familiar with the matter said that Microsoft decided to "go hostile" with its bid within the last few weeks after Yahoo ignored its latest overtures.

The offer, $31 a share in cash and stock, is a 62% premium to Thursday's closing price. Microsoft said Yahoo holders would be able to trade their shares for cash or 0.9509 Microsoft shares a piece, with no more than half of the overall purchase price paid in cash.

"We're very, very confident that it's the right path for Microsoft and for Yahoo," Mr. Ballmer said in a conference call Friday. The bid is "the next major milestone in Microsoft's companywide transformation to embrace online services overall and to invest very successfully" in online search advertising.

Mr. Ballmer said he discussed the offer late Thursday with Yahoo Chief Executive Jerry Yang. He also signaled the announcement of Microsoft's deal was aimed particularly at Yahoo's employees. Morale has been an issue at Yahoo as the company has struggled and prepares for a round of layoffs.

In a statement, Yahoo acknowledged that it received the proposal from Microsoft and said that its board of directors "will 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."

The offer may be an attempt to get Yahoo back to the table after the companies held collaboration discussions in late 2006 and early 2007. Those talks included the potential of a merger proposal, but Yahoo told Microsoft in February it wasn't interest in buyout talk.

Any combination would likely attract the attention of antitrust regulators in the U.S. and Europe.

An acquisition of Yahoo would give Microsoft massive firepower in its long-running effort to boost its online offerings. The two companies are second and third in the hot area of Web search behind Google and among the top sellers of advertising online. In his letter to Yahoo, Mr. Ballmer said the online advertising market is "increasingly dominated by one player," a reference to Google. "Together, Microsoft and Yahoo can offer competitive choice while better fulfilling the needs of customers and partners," he added.

Yahoo shares soared on the news, jumping 49%, or $9.44, to $28.60 in morning trading on the Nasdaq Stock Market. Microsoft fell $1.26 to $3.34, also on Nasdaq.

Microsoft noted the market for online advertising is "increasingly dominated by one player. Together, Microsoft and Yahoo can offer competitive choice while better fulfilling the needs of customers and partners."

The company added the deal would also result in "combined engineering talent to accelerate innovation," a hint that Microsoft can't alone take on Google with its current staff. Microsoft executive Kevin Johnson said a merger would result in "R&D critical mass to deliver innovation breakthroughs. The industry will be well served by having more than one strong player."

Renewed takeover speculation fired up after Yahoo late Tuesday posted a drop in fourth-quarter net income and issued a 2008 outlook that fell short of analysts' expectations.

Speculation about a Yahoo buyout has swirled since last year, when Microsoft's interest in such a deal was reported. Buying Yahoo would theoretically place Microsoft as significant competitor in the Internet search market, where it has so far lagged behind both Yahoo and Google.  Microsoft, which has thriving software businesses that could fund a much deeper foray into Internet markets, hadn't actively dispelled rumors it was considering an acquisition of Yahoo.

The proposal is subject to the negotiation of a definitive agreement between the two companies. Microsoft is saying a deal could close in the second half of the year.