Microsoft and Yahoo confirm 10-year search advertising deal

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Microsoft offers $44.6 billion for Yahoo

SAN FRANCISCO, February 1, 2008: Microsoft said Friday that it had made an unsolicited offer to buy Yahoo for about $44.6 billion in a mix of cash and stock, a bold move to counter Google's online pre-eminence.

If consummated, the deal would redraw the competitive landscape in Internet consumer services, where both Microsoft and Yahoo have both struggled to compete with Google.

The offer of $31 a share represents a 62 percent premium over Yahoo's closing stock price of $19.18 on Thursday. It would be Microsoft's largest acquisition ever.

Microsoft said the combination of the two companies would create efficiencies that would save approximately $1 billion annually. The software giant also said that it has an integration plan to include employees of both companies and intends to offer incentives to retain Yahoo employees.

Steven Ballmer, the Microsoft chief executive, said that he called his Yahoo counterpart, Jerry Yang, on Thursday night to tell him that Microsoft intended to bid on the company, and that they had a substantive discussion.

"I wouldn't call it a courtesy call," he said in an interview.

Ballmer said he had decided to pursue a takeover because friendly deal negotiations would most likely be protracted and would probably become public.

"These things are hard to keep quiet in the best of times," he said. He said his conversation with Yang was constructive, but suggested that a deal may not come easily.

Yahoo said in a news release Friday that its board would evaluate Microsoft bid "carefully and promptly in the context of Yahoo's strategic plans."

In a letter to Yahoo's board, Ballmer wrote that the two companies discussed a possible merger, as well as other ways to work together, in late 2006 and 2007. Ballmer said that in February 2007, Yahoo decided to end the merger discussions because its board was confident in the company's "potential upside."

"A year has gone by, and the competitive situation has not improved," Ballmer wrote.

As a result, he said, "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."

Ballmer met several times in late 2006 and 2007 with Terry Semel, then Yahoo's chief executive, people involved in the talks said. While the talks - originally focused on the prospect of a merger or a joint venture - were initially constructive and appeared to move forward, they quickly broke down, these people said.

After a series of secret meetings between both sides in hotels around California and elsewhere, Semel and Yahoo's board decided against progressing with the talks, betting that its stock would turn around as it introduced a new advertising system called Panama, these people said. Yang, in particular, was adamantly against selling the company to Microsoft and championed the view of remaining independent, they added.

Ballmer constantly consulted with Bill Gates, the Microsoft chairman, about the progress of the negotiations, people close to the company said, and when the talks collapsed, he decided to wait to see the fate of Yahoo's stock price. As the stock continued to fall, they said, Microsoft's management became emboldened and began internal meeting in late 2007 about the prospect of making a hostile bid.

Despite their heavy investments in online services, both Yahoo and Microsoft have watched Google extend its dominance over Internet search and the lucrative online advertising business that goes along with it.

In recent months, Yahoo has struggled to develop a plan to turn around the company under Yang, its co-founder, who was appointed chief executive amid growing shareholder dissatisfaction last June.

Yahoo investors, however, remain skeptical. The company's shares have slumped, and the closing price on Thursday was 44 percent below its 52-week high.

In pre-market trading Friday, Yahoo's shares were up 50 percent, to almost $29. Microsoft's shares were down about 4 percent, and Google's shares were down 6 percent.

Microsoft, like Yahoo, has faced an uphill battle against Google. The company invested heavily to build its own search engine and advertising technology. Last year, it spent $6 billion to acquire the online advertising specialist aQuantive. Microsoft's online services unit has been growing, but remains unprofitable.

Meanwhile, Google's share of the search market and of the overall online advertising business has continued to grow.

Announcing its quarterly earnings earlier this week, Yahoo said it would cut 1,000 jobs in an effort to refocus the company and reduce spending, and issued an outlook for 2008 that disappointed investors.

The timing of Microsoft's bid could allow the company to mount a proxy contest for control of Yahoo's board should it try to dismiss the offer. Microsoft has discussed the prospect of mounting such a campaign, people close to the company said, and has until March 13 to propose a slate.

In his letter to Yahoo's board, Ballmer wrote, "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."

On Thursday night, Yahoo announced that Semel, its nonexecutive chairman and former chief executive, was leaving the board. Under Semel, a long-time Hollywood studio executive who ran Yahoo from 2001 to 2007, the company became more focused on its advertising and media businesses, but was unable to keep up with Google's challenge in Web search and advertising and with the rise of social networking sites like MySpace and Facebook.

A longtime board member, Roy Bostock, has been named nonexecutive chairman, Yahoo said.

Microsoft said it believes the Yahoo transaction could receive the necessary regulatory approvals in time to close by the second half of this year.

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SAN FRANCISCO, February 3, 2008: For decades, Silicon Valley has been the land of eternal optimism and high anxiety, traits that pitch into overdrive anytime a seismic business event washes across the corporate and entrepreneurial landscape here — like, for example, Microsoft's blockbuster $45 billion bid for Yahoo on Friday.

The legions of high-tech entrepreneurs who have set up camp here with clever ideas, a willingness to scramble for financing and the energy to weather round-the-clock days have typically tethered their dreams to a singular outcome: getting fabulously rich by selling to one of the three Internet giants, Microsoft, Google or Yahoo.

But if Microsoft's takeover bid for Yahoo succeeds, that calculus becomes more harrowing because of a simple reality: the field of large, lushly endowed suitors will narrow by one. And that is a fact sure to jangle nerves already strained by growing fears of an economic recession.

"From a start-up and investor perspective, if there are more companies trying to vie for the same businesses, there are more exits," said Bismarck Lepe, a former Google employee and now chief executive of Ooyala, a year-old video host and advertising company. "It's not great for competition if there are only two acquisition targets instead of three."

To be sure, a Microsoft-Yahoo deal could be good for Silicon Valley, funneling money into the economy and triggering a round of copycat deals as other players like Google and the News Corporation look to keep up.

But Microsoft is buying Yahoo because it has steadily fallen behind Google in the lucrative online search market and because the future of computing may not be forever linked to the desktop market that Microsoft now dominates. Apparently unable to keep up with Google through internal efforts, the legendary software giant in Redmond, Washington State, has gone outside to solve its problems by trying to buy Yahoo.

So the rationale for the proposed mega-deal is based on Microsoft's own particular corporate needs and may not be a harbinger of rampant deal-making in the Valley.

Moreover, with an economic recession looming in the United States, the unsolicited bid for Yahoo comes at a difficult time for the normally cocksure world of high tech. Visibly, much of the region maintains an almost obstinate belief that it can weather any economic storm that emerges. Consumers are still flocking online, advertising is following, and the current generation of start-ups has been built frugally — with lessons from the dot-com bust of several years ago still very much in mind.

Venture capitalists also raised nearly $35 billion last year, more than at any other time since before the dot-com crash, according to the National Venture Capital Association. Those financiers are ready to make bets on countless entrepreneurs who hope to build the next Google, Facebook or YouTube.

But as the stock market lolls and an outsider, Microsoft, bids to gobble up a company that once was one of Silicon Valley's crown jewels, the region's innovators and corporate stewards appear to be growing ever more anxious. That trait is most visible in the top executives at public companies whose eyes are trained on parallel declines in consumer confidence and public equities.

Shares of Google had dropped nearly 20 percent since the beginning of the year — and then they fell an additional 8.6 percent on Friday after Microsoft made the play for Yahoo. Apple has dropped 33 percent since the start of the year. That was enough to prompt Steven Jobs, Apple's chief executive, to send a reassuring memo to options-sick employees last week that concluded: "Hang in there."

Many in the typically overconfident venture capital world say it is foolish to believe the technology sector is somehow sheltered from the storm.

"All markets are linked," says Peter Rip, a general partner at Crosslink Capital, adding that the pain might trickle down from the public markets to large private companies and eventually to smaller start-ups. "We just asked every one of our companies to take a sharp pencil to their hiring plan this year. It is going to be a bumpy ride for a while."

In a blog posting last week titled "Downturn, Now What?," Will Price, a partner at the San Francisco venture capital firm Hummer Winblad, said the recession could punish technology investors for succumbing yet again to investment fads and high valuations for companies without proven business models.

He calls these companies "Field of Dreams" start-ups, because their entrepreneurs believed that if they built popular online services, advertisers would inevitably come. Now that might not necessarily be the case.

"There's been a suspension of belief" at Internet companies without a proven way to earn money "that the market is going to let you off the hook," Price said. "These companies are going to have a hard time getting past experimental interest from advertisers when they want to start attracting really big spending."

Most Valley residents, including even the most pessimistic venture capitalists, are quick to say that the Internet economy would be in an enviable position if there were a recession. Mutual funds, media companies and private equity firms are all trying to get in on the Internet action. The online advertising market is booming.

This is where true believers are likely to ward off recessionary fear with two numbers: 21 and 7. Twenty-one percent of the average American's media-consumption time is spent online, analysts say, yet only 7 percent of all advertising is online. The hope is that advertising will inevitably shift online and close this gap, whatever the economic outlook.

"Consumer eyeballs are flooding from traditional media to the Internet," said Seth Sternberg, chief executive of the online chat company Meebo. "Recession or not, big companies have to figure out how to do really great brand advertising on the Web to keep their brands in front of users."

For that reason, many Internet executives say that traditional media companies — not Web properties — are likely to be the first victims of any advertising pullback. "If our advertisers cut their marketing budget by 15 or 20 percent, that will hurt," said John Battelle, who ran the Industry Standard magazine during the first dot-com boom and now runs the online ad network Federated Media (The New York Times Company has invested in Federated). "But my guess is that they will cut it first in print or TV and not online."

Still, the dot-com bust — and its destructive reverberations — continues to cast a shadow over even the most optimistic Internet evangelist. In 2000, as the stock market cratered and fear spread, venture capitalists pulled the plug on hundreds of start-ups and wrote off millions of dollars in losses.

Frank Addante's online advertising company at that time, L90, went public and reached a tantalizing market capitalization of $500 million before the dot-com bubble popped and L90 was forced to sell its technology to a rival and file for bankruptcy protection.

Not surprisingly, Addante is keeping one eye on the economy.

Now the chief executive of another online advertising company, the Rubicon Project, Addante, like other entrepreneurs, is confident that the tech sector would survive an economic downturn.

But he is also hedging his bets. Earlier this month, the company raised $21 million in venture capital before it needed a cash infusion, in part, Addante said, because such capital may not be available in the coming year.

"When money is on the table and it's a decent deal, sometimes you have to go and take it," he said. "You never know what's going to happen in the markets."

Like Addante, Max Levchin, the chief executive of Slide, says that the United States is on the road to recession and that Silicon Valley start-ups could be headed for a venture capital-mandated round of belt tightening. So Levchin, who co-founded PayPal, a company that successfully weathered the dot-com crash, decided to take the money while the going was good: He recently raised $55 million in additional financing for Slide, a company that makes video- and photo-sharing tools.

"We determined that if we were going to raise money, we would have a much easier time of it at the end of 2007 than at any time during 2008," he said. "I don't think I was the only guy in town who thought that."

Lepe of Ooyala recalls his drives to Mountain View, California, in 2001, when he would see a new empty billboard off Highway 101 each week as pessimism spread through the community.

The lesson: Economic downturns have a way of fostering panic and transforming a community's collective consciousness. "So much in the Valley — whether a company gets funded or not — happens on gut instinct," Lepe said. "If someone's house isn't being sold and they can't go out and buy their yacht, it does have an impact on their psychology."

And what psychological impact could a potential Microsoft-Yahoo deal have on Silicon Valley's heady business environment? While he worries about the reduced number of potential acquirers, Lepe also speculates it could have a positive outcome, if it stimulates a flurry of deal-making in the industry.

But not many entrepreneurs are holding their breath — for a new round of deals or for a sea change in the current business climate — because of a possible megamerger of Microsoft and Yahoo. Sternberg of Meebo said a marriage of the two Internet titans could benefit start-ups like his if Yahoo and Microsoft were able to deliver on the promise of a more efficient online advertising system. But that could be years off.

"Does this impact our world overnight? Definitely not," he said, "at least as far as I can see."

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Yahoo sale could be bad news for Silicon Valley minnows

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Microsoft bid for Yahoo faces inquiry

February 4, 2008 -- The US competition authorities will launch an investigation this week into the proposed takeover of the internet portal specialist Yahoo by Microsoft.

The US Congress's Judiciary Committee is to hold its first hearing on the deal on Thursday, even though Yahoo has yet to formally respond to Microsoft's proposals, unveiled on Friday.

John Conyers and Lamar Smith, respectively the Democrat and Republican congressmen who run the Judiciary Committee, said the deal was so large that it presented "important issues regarding the competitive landscape of the internet" and it therefore intended to give the proposal "a careful examination".

"The committee will hear from experts who will weigh in on whether this proposed consolidation works to further or undermine the fundamental principles of a competitive internet," it said.

While the Judiciary Committee does not have powers to veto a deal between Microsoft and Yahoo, its interest will cause some anxiety at the computing giant, which has had its fair share of run-ins with competition regulators, particularly in Europe.

Neelie Kroes, the European Union's competition commissioner, has also signalled that she would want to investigate a merger between Microsoft and Yahoo, though she has also said that previous rulings against the company would be irrelevant to such an inquiry.

Three years ago, the European Commission fined Microsoft €497m (£374m) for market dominance abuses and it has subsequently opened two new competition inquiries into the American company.

However, the dominance of the internet giant Google in the search engine market would make it difficult for competition watchdogs on either side of the Atlantic to intervene in an alliance between Microsoft and Yahoo. The two companies combined would still have a smaller share of the market than Google, and would also remain behind on most types of advertising.

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Pour concurrencer Google :
Microsoft veut mettre la main sur Yahoo !

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Google cries foul over Microsoft's Yahoo bid

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Google proposes Yahoo tie-up