Eyes on Google, Microsoft Bids $44 Billion for Yahoo
Miguel Helft and Andrew Ross Sorkin
SAN FRANCISCO — Jerry Yang, the chief executive of Yahoo, was finishing a regularly scheduled company board meeting Thursday night when his assistant interrupted him with an urgent phone call.
It was Steven A. Ballmer, the chief executive of Microsoft, and his message was curt. He did not call to negotiate. Microsoft would make public a hostile $44.6 billion offer for Yahoo early Friday morning in a bold move to counter Google’s online pre-eminence.
Mr. Yang, in shock, rushed back with the news to his directors, some of whom were getting ready to leave Yahoo’s headquarters in Sunnyvale, Calif. The board meeting was no longer over; it would turn into a strategy session that stretched into the night.
The message that jolted Mr. Yang also jolted the technology industry. Yahoo, founded by two Stanford graduate students, Mr. Yang and David Filo, was once the leader of the dot-com world. But it has been dethroned in recent years by Google, itself founded by two Stanford graduate students.
For its part, Microsoft has struggled to compete with Google’s ever-widening lead in search and advertising as the computer world shifts from desktop products to online software and services supported by ads.
Each company has persistently tried to best Google but failed. “No one can compete with Google on their own anymore,” said Jon Miller, the former chairman and chief executive of AOL, which itself is struggling to compete in online advertising. “There has to be consolidation among the major players. It has been a long time coming, and now it is here.”
If consummated, the deal would instantly redraw the competitive landscape on the Internet. And it would escalate the rivalry between Microsoft and Google, already the most intense high-stakes battle in the technology world, over who will dominate the booming online advertising business.
The offer of $31 a share represents a 62 percent premium over Yahoo’s closing stock price of $19.18 on Thursday, a far cry from its peak of $118.75 right before the dot-com bubble crash. The offer includes stock and cash and is likely to put intense pressure on Mr. Yang and Yahoo’s board, which ended earlier merger discussions with Microsoft about a year ago.
Microsoft shares fell 6.6 percent Friday, to close at $30.45; Yahoo rose 48 percent to close at $28.38.
Yahoo has spent billions of dollars in recent years to develop better search and advertising technology, and started a clumsy effort to create Hollywood-style entertainment for the Web. But Yahoo’s growth has lagged, prompting Mr. Yang, who was appointed chief executive last summer amid growing shareholder dissatisfaction, to announce major layoffs this week — 1,000 of its 14,300 workers. He also warned investors that a turnaround was not likely until 2009.
For Microsoft, the bid underscores both the company’s urgency and its determination to succeed online. “I personally thought long and hard about this,” Mr. Ballmer said Friday morning after the bid was announced. The bid for Yahoo, he said, was “the right path.”
The two companies, distant No. 2 and No. 3 players in Internet search, previously considered combining into a more powerful force that would have the power and audience to take on Google, No. 1 by a wide margin in both Internet search and online advertising.
Mr. Ballmer met several times in late 2006 and early 2007 with Terry S. Semel, then Yahoo’s chief executive, people involved in the talks said. After a series of secret meetings between the sides in hotels around California and elsewhere, Yahoo’s board decided against progressing with the talks, betting that its stock would turn around, these people said. Mr. Yang, in particular, was adamantly against selling the company, they said.
Mr. Ballmer constantly consulted with Bill Gates, Microsoft’s chairman. Then this week teams of bankers and lawyers holed up in two low-slung podlike buildings on Microsoft’s campus plotted how much to bid. After Yahoo reported weaker-than-expected earnings on Tuesday and its stock fell, Microsoft, which had been considering a bid in the mid-$30 range, settled on $31 a share. “A year has gone by, and the competitive situation has not improved,” Mr. Ballmer wrote in Thursday’s letter to the Yahoo board. Yahoo said Friday that its board would evaluate Microsoft’s bid “carefully and promptly in the context of Yahoo’s strategic plans.”
Analysts say few companies, other than Google, would have the resources to compete with Microsoft’s bid. On Friday, Yahoo’s bankers — Goldman Sachs and Lehman Brothers — were canvassing behind the scenes for other suitors, putting out feelers to the likes of News Corporation, AT&T and others.
And Google is not likely to enter the fray because of probable antitrust objections. A Google spokesman said Friday that it would be “premature to comment.”
The proposed merger, if accepted by Yahoo’s board, could bring renewed antitrust scrutiny of Microsoft, which spent years in court battling the Justice Department.
Even if it is ultimately approved, the deal could face lengthy delays. It took the Federal Trade Commission nearly nine months to clear Google’s far smaller proposed buyout of the advertising specialist DoubleClick. That deal, announced in April, remains under review in Europe.
“This is an order of magnitude larger and will require much more scrutiny and data,” said Carl W. Tobias, the Williams professor at the University of Richmond School of Law, in Virginia. Professor Tobias said, “Obviously Google will try to weigh in and try to persuade regulators that it does raise serious questions.”
A Microsoft-Yahoo merger would give Web publishers and online advertisers “a more competitive and compelling No. 2” to Google, thus enhancing competition and consumer welfare, said Bradford L. Smith, Microsoft’s general counsel.
The combination of Yahoo and Microsoft would create a more powerful counterweight to Google. Yahoo’s audience, already the largest on the Internet, would be bolstered by the tens of millions of users of Microsoft’s services, creating a much larger online display advertising business. In Internet search, the market share of the two companies would rise to 31 percent of the American market, according to comScore. That would still be far below Google’s 58 percent share, but would help the companies attract more advertisers and higher prices for ads.
Microsoft executives said the merger would provide it with more engineering talent and technology infrastructure, and would result in annual savings of $1 billion.
The combination will also bring Microsoft relationships with a long list of publishers and advertisers, bolstering the company’s quest to become a leading seller of ads not only on its site, but on sites across the Web.
Microsoft, which paid $6 billion last year for the online advertising specialist aQuantive, already sells ads on popular sites like Facebook and Digg, as Yahoo does on eBay, Comcast and the sites of hundreds of newspapers. Google, for its part, beat out Microsoft for deals with MySpace, AOL and others. The challenge of integrating the two companies could well become one of the most complex undertakings in Microsoft’s history. “In the world of mergers and acquisitions, this is as tough as it gets,” Mr. Yoffie added.
In an interview, Mr. Ballmer acknowledged that a merger review and the integration of the two companies would take time, but he said that Microsoft would keep forging ahead in the meantime.
“We’ll keep the pedal to the metal,” he said. “I assume Yahoo will keep the pedal to the metal.”