updated with notes from this morning’s conference call; also see our latest update here
Yahoo’s troubles of late have come to a head, with Microsoft offering to lay down $44.6 billion to acquire the struggling online company. The price breaks down to $31 per share, about a 62 percent premium on the stock’s closing price yesterday of $19.18.
The offer comes as Yahoo’s stock has fallen far to its lowest price in over four years. Company chairman and former CEO Terry Semel, who rebuffed a merger offer from Microsoft a year ago, also announced his final resignation yesterday.
Microsoft made its announcement with a publicly released letter sent by Microsoft CEO Steve Ballmer to Yahoo’s board of directors, re-encapsulating the history of negotiations between the companies over the past two years and listing the advantages of combining forces.
“Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition,” Ballmer’s letter states, in reference to Google. It goes on to lay out four advantageous factors a combined company could hold against its large competitor: Scale economics, expanded R&D, operational efficiencies, and new user experiences.
The possible effects of combining the two massive companies on the rest of the Internet is somewhat harder to gauge. For starters, there would likely be a polarization of Microsoft/Yahoo and Google as the two major advertising forces, possibly pulling market share away from smaller competitors. Microsoft and Yahoo would also get a renewed chance at capturing a significant slice of the search engine market, which has been steadily captured by Google over a period of years.
Microsoft also notes in the letter that it intended to offer “significant retention packages” to Yahoo’s “engineers, key leaders, and employees across all disciplines”, indicating that it intends to keep the Sunnyvale-based Yahoo as a more or less separate business from Redmond. Yahoo, however, already recently announced the layoffs of about 1,000 employees.
Update: Notes from the call led by Microsoft’s Ray Ozzie and Ballmer, as taken by contributing writer Saumil Mehta:
A decent bit of the call was duck and weave, as expected, but here goes:
From Kevin Johnson:
– second pillar of synergies is around increased R&D capacities such as mobile, online commerce, etc.
– third synergy is to remove duplicate cap ex for search and advertising. combine to a single ad platform and drop costs.
– fourth synergy is: operating efficiencies will increase because of this.
– Impact of 4 synergies will drive shareholder value
– Based upon the successful integration of TellMe and aQuantive, feel confident that this is possible.
Ray Ozzie joins:
–search and social media dominate the web. Social platforms have transformed how we communicate. Yahoo has played a key role and we hava lot of respect for their engineering organization.
Chris Odell joins:
50% cash and 50% equity. Looking to close in Q2 08.
Question from Sanford Bernstein for Ballmer: Why another deal when aQuantive is already done? How has the aQuantive acquisition fared?
Answer: consumers, advertisers, publishers are the 3 constituencies. aQuantive addressed the advertiser component
but was essentially transparent to the end consumer.
Question from UBS: Revenue synergies from software deals have been elusive.
Answer: From an advertising perspective, scale matters. Yield will go up for search as well as non-search advertising
— Will not relate operating margins to the corporate average.
Question from Sarah Fryer of Goldman Sachs: Do you expect competition on this deal?
What about the price? How was it arrived at?
Answer: Reaction from the publishers has been very positive. Claims that a more competitive #2 will be created.
— said very clearly that Google cannot take an interest in this because they have 75% of paid search business.
Question from Imran Khan from JP Morgan:
Answer: Two engineering forces that are overlapping on the same problems. Search is being very heavily stressed.
— Default would not be to make any change in any of the existing minority relationships.
Question from Bear Sterns: What about risk of integration? What about just expanding r and d internally?
Answer: Market continues to grow and the leader continues to consolidate position. This is the right time for
us to consolidate for a strong #2.
— Employees in both companies share a common passion.
[Missed part of this but was mostly about integration issues]
— Yahoo brand is a great brand. Will have a joint leadership team and a clear set of principles.
— Specific decisions on the integration are not yet clear.
— From Steve B.: Windows will become more “live”. Both companies need to get together to figure out how.
Update II: Saumil expands on the logic behind the deal here.
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