Microsoft preps for hostile takeover of Yahoo!

Microsoft preps for hostile takeover of Yahoo!

Summary: Microsoft just announced a $44.6 billion offer for Yahoo. Microsoft CEO Steve Ballmer made the half-cash, half-stock offer in a brutal carrot-and-stick open letter to Yahoo's board of directors this morning. The Redmond giant appears to laying the groundwork for a hostile takeover if it comes to that. "Depending on the nature of your response," writes Ballmer, "Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!'s shareholders are provided with the opportunity to realize the value inherent in our proposal."

SHARE:

Microsoft offers $44.6 billion for YahooMicrosoft just announced a $44.6 billion offer for Yahoo. Microsoft CEO Steve Ballmer made the half-cash, half-stock offer in a brutal carrot-and-stick open letter to Yahoo!'s board of directors.

The Redmond giant appears to laying the groundwork for a hostile takeover if it comes to that. Ballmer writes that the board spurned an earlier attempt at acquisition in early 2007:

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.

By pointing out that management's strategy has not worked, Ballmer seems to be putting a wedge between the board on one side and stockholders and Yahoo! employees on the other side. In the letter, he writes that this proposal "represents a compelling value realization event for your shareholders", and goes on to describe how attractive Microsoft's stock is compared to Yahoo!'s. Not noted for his subtlety, Ballmer really drives the wedge home with these quotes:

You should also be aware that we intend to offer significant retention packages to your engineers, key leaders and employees across all disciplines. ...

Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!'s shareholders are provided with the opportunity to realize the value inherent in our proposal.

Why is Microsoft making its move now? While not mentioned by name, clearly Microsoft has Google in its sights with this deal:

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.

After the break, you'll find the full text of the letter that Microsoft sent to Yahoo!'s Board of Directors:

January 31, 2008

Board of Directors Yahoo! Inc. 701 First Avenue Sunnyvale, CA 94089 Attention: Roy Bostock, Chairman Attention: Jerry Yang, Chief Executive Officer

Dear Members of the Board:

I am writing on behalf of the Board of Directors of Microsoft to make a proposal for a business combination of Microsoft and Yahoo!. Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft's closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock. Microsoft would provide each Yahoo! shareholder with the ability to choose whether to receive the consideration in cash or Microsoft common stock, subject to pro-ration so that in the aggregate one-half of the Yahoo! common shares will be exchanged for shares of Microsoft common stock and one-half of the Yahoo! common shares will be converted into the right to receive cash. Our proposal is not subject to any financing condition.

Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008. The implied premium for the operating assets of the company clearly is considerably greater when adjusted for the minority, non-controlled assets and cash. By whatever financial measure you use - EBITDA, free cash flow, operating cash flow, net income, or analyst target prices - this proposal represents a compelling value realization event for your shareholders.

We believe that Microsoft common stock represents a very attractive investment opportunity for Yahoo!'s shareholders. Microsoft has generated revenue growth of 15%, earnings growth of 26%, and a return on equity of 35% on average for the last three years. Microsoft's share price has generated shareholder returns of 8% during the last one year period and 28% during the last three year period, significantly outperforming the S&P 500. It is our view that Microsoft has significant potential upside given the continued solid growth in our core businesses, the recent launch of Windows Vista, and other strategic initiatives.

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. Synergies of this combination fall into four areas:

  • Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.
  • Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.
  • Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.
  • Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.

We would value the opportunity to further discuss with you how to optimize the integration of our respective businesses to create a leading global technology company with exceptional display and search advertising capabilities. You should also be aware that we intend to offer significant retention packages to your engineers, key leaders and employees across all disciplines.

We have dedicated considerable time and resources to an analysis of a potential transaction and are confident that the combination will receive all necessary regulatory approvals. We look forward to discussing this with you, and both our internal legal team and outside counsel are available to meet with your counsel at their earliest convenience.

Our proposal is subject to the negotiation of a definitive merger agreement and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of Microsoft common stock, we would provide Yahoo! the opportunity to conduct appropriate limited due diligence with respect to Microsoft. We are prepared to deliver a draft merger agreement to you and begin discussions immediately.

In light of the significance of this proposal to your shareholders and ours, as well as the potential for selective disclosures, our intention is to publicly release the text of this letter tomorrow morning.

Due to the importance of these discussions and the value represented by our proposal, we expect the Yahoo! Board to engage in a full review of our proposal. My leadership team and I would be happy to make ourselves available to meet with you and your Board at your earliest convenience. Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!'s shareholders are provided with the opportunity to realize the value inherent in our proposal.

We believe this proposal represents a unique opportunity to create significant value for Yahoo!'s shareholders and employees, and the combined company will be better positioned to provide an enhanced value proposition to users and advertisers. We hope that you and your Board share our enthusiasm, and we look forward to a prompt and favorable reply.

Sincerely yours,

/s/ Steven A. Ballmer Steven A. Ballmer Chief Executive Officer Microsoft Corporation

Topics: Social Enterprise, Microsoft

Ed Burnette

About Ed Burnette

Ed Burnette is a software industry veteran with more than 25 years of experience as a programmer, author, and speaker. He has written numerous technical articles and books, most recently "Hello, Android: Introducing Google's Mobile Development Platform" from the Pragmatic Programmers.

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

71 comments
Log in or register to join the discussion
  • Not sure

    I'm not sold on the idea of Microsoft getting any bigger. Nor am I sold on the idea of Microsoft taking over a free service. Don't get me wrong, I'm a Microsoft program junkie, but I'm not sure that Yahoo! users will benefit in the end. Yes - business is not for the benefit of the users but for the benefit of the investors, however, I would like to know how they are going to handle the free messenger, free email, etc. before I would be personally sold on this idea.
    kristina_gehring@...
    • And how would they handle overlap

      Remember MS already has a free messenger, free email etc.. So I'm wondering if and how those kinds of things would be merged.
      Ed Burnette
      • One thing's for sure

        A big "Works best with Windows Vista" will be on the front page.
        Not great for choice in other words.
        Mikael_z
      • They'd prolly screw it up

        They'll take over and withing a year or two, you won't see the Yahoo logo anywhere. Everything will have that "Works Best With Vista" crap associated with it. The Yahoo front page will disappear and all those millions of yahoo email accounts will suddenly have a hotmail handle after them.

        All over yahoo's lousy search engine, which isn't much better than Microsoft's own loser.
        hasta la Vista, bah-bie
    • dont worry

      do you really think they would risk upsetting 100 million yahoo customers. dont bet on it.
      pcguy777
      • Didn't people say that about

        What became the hot(junk)mail system? Me, I'd worry. Microsoft doesn't get what it doesn't get, and reading Ballmer's letter to Yahoo doesn't make me think he/Microsoft get Yahoo's business (even if it's not doing stellar business these days).
        ego.sum.stig
    • not again!

      I remember what Microsoft did to Hotmail several years ago. I quit using hotmail at that time. I get some of my news thru Yahoo, as well as use a Yahoo address for registering at sites some my local e-mail account doesn't have to deal with spam from registering at sites. I also have a gmail account that I use sparingly right now. If Microsoft succeeds in taking over Yahoo, which, I believe, unfortunately, is inevitable, I will be saying bye-bye to my yahoo account, and will open a second gmail account for the same purpose.
      I don't want to see Microsoft screw up yahoo mail as they did hotmail.
      boilers78
  • Desperation is expensive, it seems

    Desperation is expensive is seems. No other comment
    pdwarren
    • Microsoft would do fine without this

      MS is going to be printing money for the foreseeable future with Office and Vista so I'm not sure why they need to make such a big gamble.
      Ed Burnette
      • The transforming web

        The web is becoming more and more what MS has feared all along: A better
        alternative to the desktop, office software and much more. They realize this
        because in spite of all their shoddy, half baked software are they not stupid and
        have seen this coming for a long time.

        So Microsoft has to transform into something else too or die a slow death.

        See for comparison the spectacle around music and movie piracy and how an entire
        industry has to adapt or slowly die they too.
        Mikael_z
  • RE: Microsoft preps for hostile takeover of Yahoo!

    I would consider moving my 20 YAHOO Groups elsewhere. MS stands for Menace to Society.
    wieloszynski@...
    • Why not move them to Google?

      That's where mine are going.
      JackLR
      • So its ok to think Google everthing and not MS... strange minds at work

        whatever...

        you act as if this would really affect your life.

        puhhleeeese.
        pcguy777
        • That is not what I am saying.

          I am not suggesting Google because a Google Monopoly > MS Monopoly. However, Yahoo! Groups have been plagued with problems over the last year (periods of outages in message delivery and unequal policy enforcement come to mind), and I expect more to come as MS tries to re-brand (or at least add their flavor) to all the current Yahoo! offerings. Google offers a suitable alternative.

          As to affecting my life, what do you know about me? NOTHING. But I will tell you this: As the president of a small non-profit company who uses freeware group messaging services to communicate with my board of directors, I rely on a dependable service that does not burden our company with additional expenses. I have found that reliability in Google after finding Yahoo! to be disappointing.

          As I said in another post, Google is more appealing than Microsoft to most because of the way each company treats their users and in the quality of the products they produce. I do not fear a monopoly if the monopoly gives me no reason to fear it.
          JackLR
          • Blinders

            As a president as a small company, that you feel you dont need to "fear Google" yet do need to "fear Microsoft" demonstrates that you are chugging Google koolaid.

            Many articles have been written about Googles strong arm tactics in their core business. Ask eBay how they feel about the supposed "nice guy" Google. You dont explode into a multi-billon dollar company in 9 years without being a pirate of some sort.

            Do people not really get this? I mean what is the quality of Google "products" you're referring to? What is their track record "treating users"? MSFT has been around since the 70s. Google is essentially a brand new company. Its amazing the blind faith people feel comfortable putting in them. Personally, I think you're dellusional.

            Let me ask though. How is it that you "fear" Microsoft. Seriously. You "fear" Al Qaeda. Microsoft? Fear? Odd. Meanwhile who is it that successfully monetized the web and prints money off of nothing? That was Google. If MSFT had succeeded here, folks like you would be decrying how MSFT had "poisoned the internet" and made it "all about money"
            mlambert890@...
          • MSN groups are junk

            Plain & Simple I am not an IT tech, just a hard working user and tech junkie. I do use both services.

            MSN has been plagued (MSN Groups) with services that have not worked for near a year. (The invite section) Missing images, slow responses, etc.
            Micro junk is and has been as we all know getting to big for its pants and not catering to the people who made it (you & me).
            If anyone can come along and setback Mr.Gates and his (not earned in my opinion) machine kudos to them.
            Anyone who buys out someones else's work to start an empire and kicks dirt back at them does not earn the right to have my respect.

            I will take my chances with Google, who yes I do own stock in.

            As for the previous post, I agree. A monopoly who treats it people and users well is better than a slap in the face with Micro Junk.
            gourddancer1@...
        • Question

          BY chance do you work for the above are have stock in the above.
          DING DONG DING DONG
          john.payne@...
    • Yahoo groups are pretty good

      I like Google groups but Yahoo groups seem more polished and seasoned to me. MS would be smart to leave them alone.
      Ed Burnette
      • usenet was better

        usenet was better, with the dedicated readers (especially with clients like Thoth
        that had started adding some nifty search features) it provided a much better
        "work-flow".

        Google's interface is like trying to do brain surgery while wearing boxing gloves.

        Yahoo!'s discussion features are OK but not great. So were HotJobs discussion
        features, in their way, before the Yahoo! take-over, and Monster's before they
        tried to cash in on the idiotic "social networking" gimmick.

        Still I'd rather have more different discussion analogs than fewer.

        Yahoo!'s HotJobs job board search needs a lot of work to make it useful. The
        ironic thing is that open source code exists to do full Boolean searches, regular
        expressions, etc., but they apparently would rather do graphical appearance re-
        writes every few months than make useful changes. All of the job boards need to
        encourage employers to post human contact names, e-mail addresses (as
        CAPTCHA-like image to discourage spammers' e-mail address harvesters) and
        voice telephone numbers answered by actual human beings... and get rid of those
        accursed "apply now" forms.

        So, when M$ tries to herd everyone away from Yahoo! e-mail to their kludgey
        hotmail, what other alternatives are there going to be for freebie web-based e-
        mail (besides gmail and brain-dead go)?
        Professor8
    • they won't merge groups

      Microsoft is not interested in moving your Yahoo groups... this is predominantly about the internet search engine and ad platform. Currently Google has market share, followed by Yahoo, followed by Microsoft. An Acquisition of Yahoo puts Microsoft in the number 2 position, in a much better place to take on the number 1. There is little value in moving existing groups of a free service across to a new platform - it's an expensive thing to do, with little value to Microsoft.
      Without need to worry about competing with number 2, they can now focus on competing with Google. All of this competition is great for us because both Google and Microsoft will compete by innovating and producing better products. A great example is how the windows live search has improved in response to Google competition... for example I now use Live search for things like image searches because this is much better than the Google image search. This improvement wouldn't have happened if Google wasn't there.
      amagangan