Everything you need to know about Microsoft's bid for Yahoo!

Posted on 5th February 2008 at 2:57 pm by Ian Macfarlane

Microsoft have made an audacious hostile bid to buy Yahoo! - will they succeed, what will the combined company look like and what does this mean for the future of the search industry?

So, Microsoft have finally made an official bid for Yahoo! If it feels like we’ve been here before, it’s because we have – rumours have been going round for a year or two that Microsoft were sniffing around. These rumours have just been shown to have had substance - Microsoft’s press release announcing their bid also includes the text of the letter sent to the board of Yahoo!, which contains this choice statement:

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.

So are they more likely to take them up on their offer this time round? Well, as Steve Ballmer’s letter helpfully suggests, Yahoo! hasn’t exactly had staggering success in the last year, and their stock price (along with many other tech stocks) has had a beating recently, down to around $20 before the bid. Microsoft’s offer of $31 per share is about 62% over this and, as such, is going to look very attractive to investors.

Numerous other potential suitors have been suggested, such as AT&T, News Corp (who own MySpace), Time Warner, various other media or telecommunications companies, and even private equity funds. Most of these companies appear to have already ruled themselves out however. The offer from Microsoft is pretty good, and most industry pundits doubt whether an alternative offer could be made that would match this.

Another suggestion doing the rounds is that Yahoo! might look again at a partnership with Google (it is rumoured that Google CEO Eric Schmidt called offering help in fending off the bid). Google are certainly unhappy about the bid, and have promptly put out a blog post decrying the deal as bad for the internet (a game of antitrust-complaints which Microsoft and Google seem to enjoy playing with each other recently). They’re not the only ones complaining – privacy groups are also already up in arms over the proposal.

Antitrust isn’t exactly a done deal yet either. While many people in the search industry have pointed to the fact that Google have over half the total market share, Yahoo! isn’t just about search, it’s also a destination. Indeed, according to Hitwise the US market share of all Yahoo! properties combined is around 13.2%, followed by Google with 7.7% and Microsoft with 2.4%. So it’s possible that a deal could be blocked here, or might go ahead but with conditions imposed requiring Microsoft to sell off some Yahoo! areas (like email or instant messaging).

So, lets assume for a moment that Microsoft does buy Yahoo! – what will the combined company look like?

Firstly, unlike many of Microsoft’s previous acquisitions (such as aQuantative) Yahoo! and Microsoft have a great deal of overlap between their products. Search, email, maps, instant messaging – you name it, chances are that if Yahoo! does it, Microsoft does too (an excellent chart showing overlapping business units has been put together here).

So one of the first decisions that would need to be made is what to do with those different businesses. After all, they would only need one search algorithm, one local site, and so on. The Yahoo! search engine is slightly more mature than the Msn Live one, so this is likely to form the basis of their future search engine, combining the odd useful bits from Live. Flickr will probably stay as-is (there’s already a protest on Flickr about the bid) as they don’t want to lose all those users. They already have interoperability between their two instant messaging clients, so there wouldn’t need to be much work done here, but one would imagine that in the long run there will be a single client rather than the two existing ones.

Presuming that they don’t have to divest any of their divisions, the combined company would be much stronger in many markets such as display advertising, email, instant messaging and maps (although they will still trail in search). In webmail (where, if you discount MySpace, Yahoo! and Msn Hotmail are number 1 and 2 with GMail trailing far down in third). In display advertising, according to comScore, Yahoo! is currently #1 and Microsoft is #3, with Google trailing for now, at least until their DoubleClick acquisition goes through. The combined company would have the largest market share in both of these areas. It would also be a solid competitor to AOL Instant Messenger, the current IM market leader, and, based on these recent Hitwise statistics, it would be fighting with Google for the number two spot in the maps market, with the market leader here being AOL’s MapQuest.

Microsoft-Yahoo! would also be the biggest combined internet property by far in terms of number of visits, at least in the US. Having this sort of influence would certainly help Microsoft push proprietary extensions onto the net, such as their Silverlight platform, which they could potentially use to supplant HTML and thus end up controlling the future direction of the web.

So, all in all, rather an exciting event in the search world. There’s quite a good chance that Microsoft will succeed in buying Yahoo! in the end, especially if the antitrust people just focus on search market share and, if so, their online efforts will get a tremendous boost. Google are obviously worried – and they should be.

File under: google antitrust acquisitions yahoo! microsoft market share

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