Microsoft’s Offer
A $44 billion bid by Microsoft (“MSFT”) to acquire Yahoo (“YHOO”) may be an indicator of just how desperate Microsoft is to dominate the internet search market. [1] This bid may be reflective of Google’s threat to the world’s largest software maker. [2] With the offer on the table, analysts can only speculate about Yahoo’s response to the $44 billion possible merger.
Yahoo’s Evaluation
Microsoft’s proposal is currently being evaluated by Yahoo. However, Yahoo CEO Jerry Yang may be unlikely to accept the bid, because accepting the bid may be indicative of Yang’s failure as CEO. Yang replaced former Yahoo CEO Terry Semel promising to secure a competitive share of search advertising revenue. [3] [4] Notwithstanding Yang’s ego, the recent trend in Yahoo’s finances may eventually lead management to accept the bid, [5] given its deteriorating profits as well as a murky 2008 outlook that caused a 23 percent drop in quarterly profits. [6] The $44 billion bid represents an eye-catching 62 percent premium over Yahoo’s stock price at the time.
Microsoft Determined to Acquire Yahoo
Microsoft CEO Steve Ballmer said, “[d]epending on the nature of [Yahoo’s] 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.” [7] Ballmer’s statement can be best described as an intention to stop at nothing. Usually, mergers and acquisitions can be either friendly or hostile. However, it is too early to speculate Microsoft’s bid as being either one or the other. From Microsoft’s point of view, a merger could be a step in the right direction for both companies. The Microsoft-Yahoo deal, if consummated, stands to be the largest in the technology industry, [8] with the potential of eliminating competitors from a projected $80 billion market by 2010. [9] In the event Microsoft decides to pursue the hostile route, the offer stands a good chance of convincing Yahoo shareholders, [10] because it may be the only way that Yahoo could regain its momentum in the industry. For one, Microsoft could grant Yahoo access to “[its] extensive computing power and data capacity, which might make it possible to offer software like Microsoft's Office Suite over the Internet.” [11] Since Yahoo Shareholders are interested in creating value in their investment, a package like offering MS Office over the internet is bound to generate their interest.
How Can Yahoo Avoid Microsoft?
Investment bankers and lawyers who deal in mergers of this magnitude would say that, in spite of Yahoo’s deteriorating finances, it still has several options available to ward off Microsoft. Yahoo could possibly seek out a white knight willing to out-bid Microsoft, outsource its search advertising to Google, or boost its stock price by disintegrating the company. [12]
(1) Although the idea of a white-knight may seem plausible for Yahoo, analysts have stated otherwise. Companies such as Disney or Time Warner could acquire to help Yahoo avoid a hostile takeover by an undesirable black knight. [13] However, these companies “already have plenty of debt, paucity of cash, and the legacy of the AOL/Time Warner deal to remind them how badly these deals can go.” [14] In 2002, AOL-Time Warner reported a $98.7 billion loss. [15] Experts attributed this loss to the few synergies that existed between the online media and traditional media company. [16] It may sound simple to combine two separate companies into one giant company. However, a McKinsey study concluded, “companies often focus too intently on cutting costs following mergers, that they neglect day-to-day business.” [17] The corollary is a steady decline in revenue and eventually profits. Business Week columnist Aaron Pressman wrote Ballmer should, “be ruthless in forcing managers to work together [and] not let one faction torpedo another by keeping alive competing brands.” [18] For example, Microsoft’s Hotmail and Yahoo’s email systems could breed unhealthy competition and lead to an even bigger financial disaster than AOL’s $98.7 billion loss.
(2) Outsourcing to Google, as mentioned above, could be another alternative for Yahoo to avoid Microsoft. Citigroup analyst Mark Mahaney wrote that such a move could boost Yahoo’s cash flow by as much as 25 percent. [19] Under this alternative, Yahoo would halt its search ad business and designate Google as its ad supplier. The partnership will significantly reduce costs and increase cash flow as less technical and sale staff will be needed. Furthermore, this plan could also be used to negotiate a higher offering price from Microsoft in the future. In theory, the Google-Yahoo alternative may prove futile for many reasons; (1) Yahoo competes with Google in the internet display ad business [20] and (2) Antitrust regulators, in the event of a full merger, may block such a merger since Google already controls more than 64 percent of the web search market. [21]
(3) Disintegrating Yahoo to form subsidiaries may seem like a good alternative, but is Yahoo even big enough to sustain such disintegration? Yahoo’s operations are divided into five main categories: Search, Marketplace, Information and Entertainment, Communications, Communities and Front Doors, and Connected Life. [22] Strategically, disintegrating the company may not be realistic since Yahoo’s core business is selling ads and content pages. Technology Business Research Analyst John Byrne said, “[a] breakup scenario would be to have [Yahoo] sell off their content sites — news, sports, e-mail, IM.” [23] However, it undervalues good business judgment for Yahoo to sell off its content sites and maintain its platform because the action could compromise Yahoo’s competitive marketplace advantage – offering free internet services.
Legal Ramifications
Legally speaking, if Microsoft were to acquire Yahoo, Microsoft’s stock will remain tradable as MSFT. [24] Alternatively, Microsoft’s possible merge with Yahoo will create a single new company, Microsoft-Yahoo (“MSFT-YHOO”), and would be traded under a different stock name. [25] These alternatives highlight the slight difference between a merger and an acquisition, although the terms may be used interchangeably. Furthermore, despite the numerous perks that Microsoft-Yahoo stands to gain from this deal, the potential takeover, if consummated, will be scrutinized critically by antitrust regulators in the United States and Europe. [26] Aside from Yahoo’s potential resistance and Google’s opposition, antitrust regulators may be the reason Ballmer’s Microsoft-Yahoo dream may not be realized. For instance, a combination between Microsoft and Yahoo could eventually create a monopoly over the internet search industry. At the current moment, Yahoo and Microsoft are ranked second and third respectively in search engines. [27] Collaboration between Microsoft and Yahoo would generate more resources giving the second and third major search engines a substantial competitive edge over the market.
Conclusion
Indeed, Microsoft stands to gain substantially from this merger. On the contrary, Yahoo will not be served by accepting Microsoft’s bid. Yahoo has enjoyed a reputation of being a leader in its industry. A merger will destroy the niche it strived to create by providing free services to internet users. Further, the Microsoft-Yahoo deal will not be in the best interest of consumers because consumers could end up paying for services that were once free. Henry Ford said “competition is the keen cutting edge of business, always shaving away at costs.” [28] However, with a market potential as big as Microsoft-Yahoo, prices and terms of services might be unfairly dictated and the once free email service may just end up costing a penny for every email sent and received.
Sources
[1] Michael Liedtke, Microsoft Makes $42B Bid for Yahoo; Executives Hope Deal Can Help Them Topple Google, Feb. 10, 2008, http://biz.yahoo.com/ap/080201/microsoft_yahoo.html [hereinafter Liedtke, Microsoft Makes $42B Bid for Yahoo] .
[2] Id.
[3] Michael Liedtke, Yahoo Board to Spurn $44B Microsoft Bid, Huffington Post, Feb. 9, 2008, http://www.huffingtonpost.com/2008/02/09/yahoo-board-to-spurn-44b_n_85835.html [hereinafter Liedtke, Yahoo Board to Spurn $44B Microsoft Bid].
[4] Juliette Garside, Yahoo! considers Google tie-up in defence against Microsoft, Telegraph.co.uk, Feb. 10, 2008, http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/04/bcngoogle104.xml.
[5] Microsoft and Yahoo: Does It Make Sense (and Will It Work)?, Knowledge@Wharton, Feb. 10, 2008, http://knowledge.wharton.upenn.edu/article.cfm;jsessionid=9a307da386666a22e5d5?articleid=1895.
[6] Erica Ryan, Microsoft-Yahoo Merger Faces Antitrust Hurdles, Feb. 10, 2008, http://www.npr.org/templates/story/story.php?storyId=18636379.
[7] Microsoft and Yahoo: Does It Make Sense (and Will It Work)?, supra note 5.
[8] Ari Levy, Microsoft Offers to Buy Yahoo for $44.6 Billion, Bloomberg, Feb. 9, 2008, http://www.bloomberg.com/apps/news?pid=20601103&sid=aLsamJL6qUQY&refer=news.
[9] Id.
[10] Ryan, supra note 6.
[11] Id.
[12] Posting of Jon Fortt to CNN, How Yahoo might get away, http://bigtech.blogs.fortune.cnn.com/2008/02/07/how-yahoo-might-get-away/ (February 7, 2008, 3:00 am).
[13] Investorwords, http://www.investorwords.com/5306/white_knight.html (last visited Feb. 10, 2008).
[14] Posting of Jon Fortt to CNN, supra note 12.
[15] Jim Hu, AOL loses Ted Turner and $99 billion, Feb. 10, 2008, http://www.news.com/2100-1023-982648.html.
[16] AOL Time Warner: A Merger Gone Wrong, Imcrindia.org, http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy1/AOL%20Time%20Warner%20Merger%20Gone%20Wrong%20Business%20Strategy.htm (last visited February 10, 2008).
[17] Investopedia, http://www.investopedia.com/terms/s/synergy.asp (last visited Feb. 10, 2008).
[18] Posting of Aaron Pressman to Business Week, http://www.businessweek.com/investing/insights/blog/archives/2008/02/how_microhoo_ca.html (Feb. 8, 2008).
[19] Posting of Jon Fortt to CNN, supra note 12.
[20] Id.
[21] Garside, supra note 4.
[22] Yahoo! Finance, http://finance.yahoo.com/q?s=MSFT (last visited Feb. 10, 2008).
[23] Id.
[24] Id.
[25] Investopedia, supra note 17.
[26] Liedtke, Yahoo Board to Spurn $44B Microsoft Bid, supra note 3.
[27] Comscore.com, http://www.comscore.com/ (last visited Feb. 11, 2008).
[28] Brainy Quote, http://www.brainyquote.com/quotes/quotes/h/henryford151871.html (last visited Feb. 11, 2008).