Confirming weekend rumors, Yahoo rejected on Monday Microsoft’s $44.6 billion cash-and-stock offer, saying the unsolicited proposal substantially undervalues the company.
In a statement, Yahoo said that its management team, along with financial and legal advisors, believe the offer doesn’t reflect cash flow, earnings potential, or recent investments in its advertising platform.
Further, Yahoo said its board would continue to evaluate other “strategic options.”
“We remain committed to pursuing initiatives that maximize value for all stockholders,” the statement said.
Microsoft offered $31 per share on Feb. 1, which was a 62 percent premium over Yahoo’s closing price the day before, and was thus characterized at the time as the proverbial “can’t refuse” type. However, since then, Yahoo’s stock has risen in value and was trading just above $29 on Monday morning.
At the same time, Microsoft’s stock has fallen since it made the offer, closing at $28.56 on Friday, down from a close of $32.60 on the day prior to the offer. Microsoft offered to pay $31 for half of Yahoo’s outstanding shares and 0.9509 of a Microsoft share for the other half.
Yahoo’s executives were rumored to have been searching for a buyer other than Microsoft. However, no buyer has emerged. Yahoo’s latest moves mean that Microsoft may have make a more generous offer, or pursue a hostile takeover.
Microsoft said it believes the acquisition of Yahoo would give it the engineering talent and resources to compete better with Google. While Microsoft and Yahoo have had some success with display advertising, Google has built a fortune on contextual text ads that appear during a searchand on third-party Web sites.
With the offer, Microsoft acknowledged it believes that it and Yahoo can’t make a credible run at Google unless they fuse into one organization.
However, skeptics doubt that jointly Microsoft and Yahoo will generate the magic potion that allows them to break Google’s stranglehold on the search engine advertising market, the largest segment of the online ad market and the source of Google’s riches. Far from making progress, Microsoft and Yahoo have seen their share of search engine queries shrink, as people’s preference for Google expands.
If Microsoft acquired Yahoo, it would face the perils and traps of integrating its Internet business with Yahoo, which has 14,000 employees and enough internal problems of its own. The integration process could be long and painful, slowing down both companies while Google speeds further ahead. Eliminating redundancies at the staff, technology and product levels would be a major undertaking.
At the product level, Microsoft and Yahoo have many overlaps in areas like Webmail, instant messaging, advertiser services, portals, content sites, mobile services, online media properties and international properties — most, if not all, based on different technology platforms that would have to be merged. Then there are the long lists of partnerships and customer engagements that they would have to work through and sync up.
Beyond the inherent challenges in fusing its Internet operations with Yahoo, the bid also prompted swift condemnation from privacy advocates in the U.S., like the Center for Digital Democracy (CDD) and the Electronic Privacy Information Center (EPIC). These organizations argue that a combined Microsoft-Yahoo would have too much power over online journalism, entertainment, advertising and other forms of communications, as well as consumers’ data.
When making its offer, Microsoft said that it is convinced that the time to make a move is now, when it still sees considerable growth for online advertising on the horizon. Microsoft expects the market for online advertising to almost double in size over the next three years, from $40 billion in 2007 to $80 billion by 2010.
With Yahoo, Microsoft is confident it can supercharge its research-and-development efforts, boost its data center infrastructure and gain a heavy influx of engineering and business talent. Microsoft also see cost reductions at the tune of about $1 billion a year by generating “economies of scale” with a Yahoo fusion.
The merger plan would be drafted jointly by both companies and Microsoft will be aggressive with compensation offers to retain key Yahoo engineers and other staff, Microsoft has said.
While it never characterized the offer as hostile, Yahoo did describe it as unsolicited and didn’t embrace it, remaining civil but noncommittal about its options, saying that it would review the offer and make the best decision for the company, its shareholders, customers and employees.
Possibly guessing that Yahoo’s management would rather keep the company independent, Google promptly swooped in and blasted the Microsoft proposal, saying it raised “troubling questions” such as whether Microsoft would attempt to replicate its “inappropriate and illegal influence over the Internet that it did with the PC. Google also reportedly entered into discussions with Yahoo over possible partnerships that would allow Yahoo to justify rejecting the offer.
On Monday, The Times of London reported, citing anonymous sources, that Yahoo is actively discussing possible tie-ups not only with Google but also with AOL and Disney.
To be sure, Microsoft would also be taking on a company that has been trying to regain its business and technology edge for about two years, and that has gone through several rounds of dramatic reorganizations and management shakeups. In other words, Yahoo isn’t precisely firing on all cylinders and Microsoft’s Internet unit would certainly run the risk of catching that corporate malaise if it’s unable to provide Yahoo with a quick cure for it.
Of course, Microsoft’s Internet business has been far from a top performer as well, long suffering from lackluster performance, despite heavy investments from Microsoft. Critics also say it is afflicted by an identity crisis caused by the introduction of the Live name, which some feel has diluted the brand power of the MSN online services.
Microsoft believes it is still early days not only in search but in social media, and specifically social networking, areas which it believes are ripe for innovation and disruption.
Although the deal is aimed primarily at jump-starting Microsoft’s online ad business, Microsoft has also said it hopes that Yahoo could boost efforts to make Windows and Office more Internet-friendly and bring them into the world of Web-hosted software. Microsoft has often been criticized for how slow it’s moved to shed its legacy of desktop software to keep up with the innovations of Web 2.0.
Now, all of this is up in the air and it seems the next move is to come from Microsoft.
Updated at 3:28 p.m. PT to add more background on the proposed deal.