Mergers and acquisitions have been around for quite some time now. We have seen the acquisitions of companies like Skype (by eBay), Hotmail (by Microsoft Corp.). This all has been happening since the 1990’s. Even in this time of a global recession, companies are being acquired for billions of dollars. Some experts say that this is the best time for acquisitions as the global market is on sale. Even start-up companies are labile to be acquired by the bigger fish in the sea.
Since it’s first acquisition in 1987, Microsoft has purchased an average of 6 companies a year. It has acquired 10 companies a year since 2005 and 10 firms in 2006 alone.
To understand the pursuit of Yahoo! by Microsoft, we need to be aware of why does Microsoft want Yahoo! when Microsoft is itself struggling in the online business. It has lost ground to Google in search. Yahoo! is an important part of Microsoft’s strategy to take on Google. Since Yahoo! has a better search engine and earns more in online advertisement, Microsoft wants to combine the scale of its recently acquired advertising networks with that of Yahoo’s, along with Yahoo’s enormous consumers (which is appealing to advertisers).
But why does Yahoo! needs Microsoft? If there was a book about Yahoo!, I’m sure the title would be on the lines of “How quickly tech empires fall”. Yahoo! made a good start in the early 1990s but it has not boomed like other tech companies. Although it has a user-base of more than 500 million (a jaw dropping statistic for advertisement agencies), but it has definitely not lived up-to the mark. It’s stock price, once hovering around the $30 mark is now close to $10 a share. At this time of financial meltdown, buy-out by Microsoft maybe a blessing in disguise for the folks in Sunnyvale.
The on-again, off-again, deal between the two corporate giants, Microsoft and Yahoo has been going on since 2005. It was only on February 1, 2008 that Steve Ballmer, CEO of Microsoft Corp made a public offer to buy Yahoo! for a whooping $44.6 billion in cash and stock at $31 per share. This would be the largest acquisition by the Redmond software giant ever. This price was quoted as 70% higher than Yahoo’s market value in January 2008.
In his letter to the Yahoo! board, the CEO of the Redmond based software firm, wrote: “Together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market.” But this was not enough. 10 days later, Yahoo! rejected Microsoft’s offer as “substantially undervaluing” Yahoo!’s brand, audience, investments and growth prospects. Even Google chief Eric Schmidt went on record saying: “could Microsoft now attempt the same sort of inappropriate and illegal influence over the internet as they did with the PC?”
On April 5, Microsoft CEO sent a letter to the Yahoo! board of directors stating that if within 3 weeks, if Yahoo! did not accept the deal, Microsoft would approach the shareholders directly in hope to electing a new board that would make the decision in favor of Microsoft. Many at Microsoft did not pleasantly accept the idea of a hostile takeover. Also the possibility of Yahoo! CEO Yang taking the poison pill would do more harm than good to the acquisition.
On May 3rd 2008, Steve Ballmer raised the offer by $5 billion to $33 a share. Yahoo! demanded $37 a share. After all the hassles, Microsoft went on record in June to say that they are not interested in pursuing Yahoo! anymore. Yahoo! also stated that they it had ended talks with Microsoft about purchasing either part of the business (search and advertising business) or all of the company. If this was not enough to push Microsoft out the door, on June 12, Yahoo! announced a non-exclusive search advertising alliance with Google. This is something that Microsoft would not be too happy about.
Whether it is the business of online advertisement or the business of online search, Microsoft has neither. Google currently has 75% of the share of online advertising market and 60% of all search inquires. If Microsoft needs to compete with Google in the Internet space, Yahoo! can be one of the tools that can give the Redmond software company a chance at doing so in the near future.