Microsoft's big Yahoo bid: Behind-the-scenes details

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Todd Bishop's Microsoft Blog

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Microsoft's big Yahoo bid: Behind-the-scenes details

Breaking news: Microsoft announced this morning that it's proposing to acquire longtime rival Yahoo for $31 a share, or $44.6 billion. It's a huge move that, if successful, promises to reshape the Internet industry, pitting Microsoft against Google in a head-to-head competition between two online giants.

Related stories and posts

Mainbar: Microsoft offers $45 billion to acquire Yahoo

Wall Street reacts

Text of CEO Steve Ballmer's e-mail to employees

John Cook: Seattle technology community reacts

Audio extra: Hear me discussing the deal today on NPR's Morning Edition.

The announcement follows months of rumors, and for Yahoo, it comes amid a sinking share price and layoff plans. Significantly, it's being made not as an agreement with Yahoo but as a proposal to its board of directors -- from which Yahoo's chairman and former chief executive, Terry Semel, resigned last night, just prior to Microsoft's announcement.

A letter Thursday to Yahoo's board from Microsoft CEO Steve Ballmer, made public by Microsoft this morning, reveals details about what has been happening behind the scenes, and about the Redmond company's plan. Excerpts from Ballmer's letter:

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.

Microsoft is holding a 5:30 a.m. conference call. More to come.

Update, 6:30 a.m.: Yahoo's statement: The company's board "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."

Update, 6:45 a.m.: Here's my initial story on the news, with details from the conference call, plus some analyst reactions.

Update, 7 a.m.: If this goes through, what becomes of the Yahoo brand? One analyst asked that question during the conference call. In short, it's yet to be determined, or at least yet to be made public. This was the response from Kevin Johnson, president of Microsoft's Platforms & Services Division, on the call.

"Look, the Yahoo brand is a great brand. We love the Yahoo brand. Part of our integration principles and the learning and working with aQuantive and TellMe is that we want to have clear integration principles and a joint leadership team of Microsoft leaders and Yahoo leaders to really work through the thoughtful process of how you land the specifics on this. We've got clear line of site to the synergies and the value creation we're going to unlock. We've got a clear set of principles, and we're going to go through a thoughtful process with great talent from both Yahoo and Microsoft to really make the specific decisions on how that will land."

Yahoo shares are up more than 9 percent in pre-market trading, to more than $28. Microsoft shares are down about 4 percent, to about $31.35.

More to come.

Update, 7:45 a.m.: The Associated Press reports that the Justice Department is interested in reviewing the proposed deal: "The antitrust division would be interested in looking at the competitive effects of the transaction,'' Justice Department spokeswoman Gina Talamona told the news service.

"We've worked closely with our legal counsel, and we're confident we can obtain all the necessary approvals in a timely fashion," said Kevin Johnson, president of Microsoft's Platforms & Services Division, in an interview. Microsoft says it expects the deal to close in the second half of the calendar year.

Update, 8:30 a.m.: What about jobs? On the phone, I asked Johnson about Microsoft's plans for Yahoo's employees, if the deal happens. Here's what he said.

Well, when you look at the four pillars of synergy that we have, one of those pillars is about expanded R&D capacity. From an engineering standpoint, we're proud of the work Microsoft engineers are doing, we're proud of the work Yahoo engineers are doing, and the combination is going to enable us to do even more work that drives innovation. So from an engineering standpoint, a key part of this is an expanded R&D capability.

Certainly one of the other pillars is operational efficiencies, and as we look across the integration plans of the two companies, a key part of that will be ensuring that we get the right people in the right jobs and we have the right resources allocated to each function. We're going to have a thoughtful integration process that will include leaders from both companies, and a clear set of integration principles.

Translation: Johnson's reference to operational efficiencies suggests that there could be job cuts, but the company isn't prepared to say how many it expects.

This might seem outlandish, but given the size of the deal and Yahoo's big Silicon Valley presence, I asked whether Microsoft would keep its current corporate headquarters. For the record, Johnson said yes, the company plans to remain based in Redmond. (Microsoft also has its own sizable Silicon Valley operations already.)

Posted by at February 1, 2008 4:20 a.m.
Categories: Financial & Corporate, Microsoft's Yahoo Bid, Yahoo

Comments

#93210

Posted by unregistered user at 2/1/08 4:36 a.m.

Well, I am certainly glad that I bought Yahoo! stock.

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