MSN Going Nowhere Bids For Yahoo

Microsoft has made a public bid for Yahoo where Microsoft will pay approx $44.6B made up of half stock and half cash.

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.

This is the single largest deal that Microsoft has ever done and although they are capable of funding this deal, this is still a big chunk even for Microsoft. The letter to the board of Yahoo also implies tacitly that it is their position that they cannot compete effectively with Google and neither can Yahoo.

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.
Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition.

At the end there is a phrase that basically states that they are prepared to make the deal hostile (meaning without board support).

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.

The combined entity will still trail Google significantly in search traffic and advertising revenue, however it still begs the question, does the second and third place combined make a compelling offering? or is something else needed. On the regulatory issue, they are confident this will be accepted. They will argue that Google is in such a dominant position in search that their combination will not consolidate market power. They will also argue that the Windows monopoly has made no difference in the creation of this market and they would be true to a point. Previous litigation forced them to stop punishing anyone to wanted to put another browser or start page on their PC.

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