This piece was originally written for the University College Dublin Observer student newspaper, a bi-weekly paper written by students for students. This version is the one that I wrote and is not the version published (they edited slightly). Last week, Microsoft announced its plans to buy out Yahoo with a 44.6 billion dollar cash and stock buyout offer. This represents a 61% premium over Yahoo's stock price at the time of the offer. That premium would net Microsoft some very attractive properties including Yahoo's popular photo service, Flickr. This seemingly random announcement comes 6 months after merger talks failed last summer but soon after both Google and Yahoo! announced improvements to their online application. Possible explanations for the timing point to the obvious, the 800-pound gorilla in room known as Google. However, verbiage in Microsoft's letter to Yahoo! made the move sound as though Redmond had lost patience in waiting for Yahoo to submit to their monopolistic ways.
So far, Yahoo has been able to stay independent without needing a dominant company like Microsoft to hold their hand. But let us be honest, this takeover is all about the money - online advertising money to be precise. Steven Ballmer, Microsoft's CEO, outlined "search and online advertising... new innovations in the areas of video, mobile services, online commerce, and social media" to be the crown jewels of the deal in his letter to Yahoo executives last week. Indeed, Yahoo has the highest readership among websites with upwards of 500 million hits per month, an online search and advertising business second only to Google as well as number of other online communities. Now just add the fact that you have knocked off the only competition between you and Google and you are looking at the same incentives the Microsoft execs are no doubt salivating over.
There does not seem to be much of an upside for Yahoo, unless of course you forget the 61% premium Microsoft planning to pay for Yahoo's stock. Ballmer made sure to threaten the Yahoo management team with investor power by adding rhetoric about "reserving the right to ensure investors understand the opportunity [they] are offering. Indeed, some analysts are predicting that if Yahoo execs do reject Microsoft's offer, large investors may apply strong pressure since they face substantial returns on their investment. So the question stands, does Yahoo have a choice? Well, yes - sort of. Google has expressed objections to anti-competitive nature of the potential merger and offered to "help" Yahoo! fend off the buyout in the same breath. Other options include finding another buyer or going private by partnering with a private equity firm.
One other option would be to outsource search and advertising to Google as they have in the past, thereby making themselves almost toxic to Microsoft. Redmond would inevitably baulk at investing in a venture that would benefit that "significant competitor" that Ballmer talks about in his internal communications and the buyout offer itself.
At a glance, this offer seems to have come out of nowhere but in Microsoft's defense, Yahoo is a very attractive purchase. The combined entity would become a strong rival to Google's search and ad platforms while standing to shape the face of social networking. Some industry analysts posit that the merger would create more competition despite the Google's please of foul. Others cheer the move amidst concerns that Yahoo does not have direction or a clear idea what their business really is. Over the years they have dabbled in social networking, messaging, email, finance, content and news creation, and now are writing software for enterprise electronic communication solutions. A Microhoo would probably have a clearer mission for each of the respective brands while leveraging the significant engineering talent of each company.
As of press time, Yahoo! is still sitting on the takeover offer reviewing their options to find the decision that is "best for Yahoo! and our shareholders" as Jerry Yang, CEO and co-founder writes in an internal email. Unfortunately for Microsoft, the longer Yahoo stalls, the farther their stock prices fall. In contrast, Yahoo's stock price has risen enough that Redmond might be forced to make a new bid. Only time will tell but in the interim, grab some popcorn, a Guinness, and wait with bated breath. Hopefully we will get an outcome in the next week or so.