Microsoft Bids $44 Billion for Yahoo To Go Head-to-Head with Google

It’s a jungle out there. Those who flounder, or at least show declining earnings, are eaten, or more accurately, given an offer they may not be able to refuse. As reported in the New York Times, Jerry Yang, the chief executive of Yahoo, was finishing a regularly scheduled company board meeting Thursday night when his assistant interrupted him with an urgent phone call. It was Steven A. Ballmer, the chief executive of Microsoft, and his message was curt. He did not call to negotiate. Microsoft would make public a hostile $44.6 billion offer for Yahoo early Friday morning in a bold move to counter Google’s online pre-eminence.

The price offer of P31 a share is a 62% premium over Yahoo’s closing price that day. The two companies, distant No. 2 and No. 3 players in Internet search, previously considered combining into a more powerful force that would have the power and audience to take on Google, dominant by a wide margin in both Internet search and online advertising. Acquisition talks between Microsoft and Yahoo collapsed about a year ago and Yahoo’s fortunes were on the decline.

In the meantime, despite spending billions of dollars in recent years to develop better search and advertising technology, Yahoo’s growth has lagged, prompting Mr. Yang, who was appointed chief executive last summer amid growing shareholder dissatisfaction, to announce major layoffs this week – 1,000 of its 14,300 workers. He also warned investors that a turnaround was not likely until 2009.

Consolidation among the major players is inevitable, as no single entity can take on Google by itself anymore in the lucrative online search and advertising markets. Microsoft is feeling the urgency of overhauling Google’s ever-widening lead in search and advertising. Now is a good time, with a struggling Yahoo ready to capitulate.

If consummated, the deal would instantly redraw the competitive landscape on the Internet. The combination of Yahoo and Microsoft would create a more powerful counterweight to Google and possibly change the rules of the game. The Yahoo-Microsoft combine makes the most sense. Google has become so dominant online that the merger between nos. 2 and 3 might be the only way to produce a competitor strong enough to face off with it.

Now for a reality check. Even after a Microsoft-Yahoo merger, Google would still have twice the search market of its competitor. Despite more than a year of courting advertisers and media companies, Microsoft continues to lag Google in online ad sales and in its share of the consumer search market. Yahoo, once a prime competitor to Google, has been slipping. The question is whether the consolidation can be made fast and seamlessly enough to allow the new entity to quickly refocus on toppling Google.

Why a Microsoft-Yahoo merger is a good idea in order to challenge Google’s unhealthy dominance of the lucrative online search market.

Yahoo’s recent woes may have made it more vulnerable to a take-over bid.

Microsoft’s bid for Yahoo is thus a tacit, and difficult, admission that the company mismanaged its online business and is trying to play catch-up, as explained in a New York Times item.

Google is set to put up legal roadblocks based on regulatory issues and possibly a counter-offer to scuttle Microsoft’s bid for Yahoo.

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