Microsoft Proposes to Buy Yahoo! – Reaction

When Microsoft officially announced its bid to acquire Yahoo!, there was surprise from all corners of the Internet. Tim Hoang examines the immediate fallout.

On February 1, Microsoft made official its proposal to acquire all the outstanding shares of Yahoo! for approximately $44.6 billion, valuing each share at $31 and representing a 62 per cent premium above the closing price of Yahoo! shares at the end of January.

According to a statement from Steve Ballmer, Microsoft’s chief executive, the move would allow the Washington-based company to compete more effectively with the dominance of Google in the online advertising space which is said to be worth nearly $80 billion by 2010.

"We have great respect for Yahoo and 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," said Ballmer. "We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners."

At the time of writing, the Yahoo! board has promised to review the offer. In a statement released soon after the story was made public it said:

"The Yahoo! Board is undertaking a deliberate review process. They’re going to take time to thoroughly evaluate the proposal in the context of Yahoo!’s strategic plans. This will include evaluating all of the Company’s strategic alternatives – including maintaining Yahoo! as an independent company. That process will take some time, but the Board will ultimately pursue the option that it believes can best maximize value for our shareholders…it wouldn’t be appropriate to speculate about the potential benefits or challenges of a deal."

Although there had been speculation about Microsoft’s intention to acquire Yahoo! last year – which was confirmed in a letter from Microsoft to the Yahoo! board – the news was still a surprise to technology commentators. As expected, the reaction so far has been somewhat mixed.

Google responded on Sunday night stating that the merger would raise "troubling questions" and accused Microsoft of frequently seeking to establish monopolies.

"So Microsoft’s hostile bid for Yahoo! raises troubling questions. This is about more than simply a financial transaction, one company taking over another. It’s about preserving the underlying principles of the Internet: openness and innovation," said David Drummond, Senior Vice President, Corporate Development and chief legal officer.

"Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC? While the Internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies — and then leverage its dominance into new, adjacent markets."

BusinessWeek’s Rob Hof believes that if Microsoft acquires Yahoo! for the value stated, it will be a bargain.

"For all the reasons a Microsoft acquisition of Yahoo! doesn’t make sense, one factor trumped them all: a bargain. Early this morning, Microsoft made an unsolicited bid for the Internet pioneer for $31 a share, 62% higher than Yahoo’s closing price of $19.18 yesterday. Yahoo’s stock fell far enough that, even though Microsoft is offering $44.6 billion for a company the market valued at only about $25 billion, it was too much of a steal to pass up," he wrote.

However, the announcement also raised a number of issues. Many start-up tech companies are formed with the aim of being bought by one of the three big three Internet giants: Microsoft, Google and Yahoo! According to video host and advertising firm, Ooyala, the deal will result in one simple reality for those companies: there will be one less organisation to purchase them.

"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, speaking to The New York Post. "It’s not great for competition if there are only two acquisition targets instead of three."

Some bloggers believe that Microsoft and Yahoo! should stop trying to beat Google at a game they have already lost. Speaking on his blog, Dave Kellogg CEO of Mark Logic Corporation, a company which covers next-generation database management, enterprise search, and content management, wrote: "In many ways, Yahoo’s problem was they couldn’t get past the fact that Google stole Internet search out from under them. So the company was obsessed with re-catching Google, instead of – in classic Silicon Valley style – trying to beat them to next big thing. Most strategy types think Yahoo should have said: "We screwed up. We lost search. Deal with it. Now, let’s go find the next big thing."

However, there are many tech commentators who believe that Microsoft are actually making the right strides in the next logical evolution of the web – mobility. Google has already released it "Google phone" application the Android, but has so far failed to have a strong as position as it has in search.

"So far, the Internet portal players have failed to achieve a convincing level of scale or momentum with their forays onto the small screen. Nor have any of the mobile operators achieved de facto dominance with their portal brands. When it comes to Internet services on mobile phones, everything is still to play for in a potential market measured in billions of people. The mobile Internet opportunity is certainly not the principal rationale for Microsoft’s bid for Yahoo. Looked at from the perspective of mobile, however, a merger between Microsoft and Yahoo would have some persuasive logic to it, because the two players’ mobile activities complement each other in some interesting respects," said analyst house Ovum.

There has already been an inevitable backlash in certain communities. Users of Flickr, the online photo sharing site have staged an online protest and threatened to abandon the site (though admittedly they also protested when Yahoo! bought the company).

Whatever the initial outcome of the bid, Microsoft and Yahoo! will have to have any merger approved by US and European authorities. In a joint statement, Congress Judiciary Committee members Congressmen John Conyers and Lamar Smith described Microsoft’s bid as "one of the largest technology mergers we’ve seen… 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." Ironically, Google are also experiencing similar problems in its bid to merge with DoubleClick.

With new rumours that Google chief executive, Eric E. Schmidt, placed a call to Yahoo&rsqu
o;s chief, Jerry Yang, offering the company assistance in fending off Microsoft’s interest, there is no doubt more news to come.

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