I’ve been following the Microsoft -v- Yahoo saga with interest recently. You will almost certainly have been reading about it too, but, in case not, Microsoft is on a campaign to snap up Yahoo for the princely sum of around £22.4 billion (on a per-share basis, this represents an amount that Yahoo shares have not managed to achieve at any time in the last two years).
All the commentators seem to be agreed on why Microsoft wants Yahoo - it would a be a channel through which Microsoft could compete with the other techie giant, Google, in the search engine and web advertising sectors. Google would almost certainly not be in a position to acquire Yahoo itself; it already has 75% of the market share in this area and would be prevented by anti-trust laws from acquiring a larger share. Google's only available weapon, therefore, is to raise anti-trust issues about a Microsoft –Yahoo deal, and it has been doing this, saying that the merger “raises troubling legal questions”. Microsoft also wants Yahoo because a merger would erase a potential Microsoft competitor from the slate in one clean sweep; while it’s true that Yahoo’s fortunes have been on the wane lately, it does have strengths such as Flickr and plenty of software engineering talent that Microsoft would be delighted to get its hands on.
The only spanner in the works as far as Microsoft is concerned is that, at the moment, it looks like Yahoo doesn’t want to do the deal. At the end of March, Microsoft sent a strongly worded letter to the Yahoo board in which it expressed disappointment that no progress had been made and threatened to make a direct approach to Yahoo shareholders in a “hostile takeover” if there is no deal by 26th April. The letter contained an “incentive” to the Yahoo board in the form of a threat to lower the offer price if Microsoft has to resort to an offer that is not backed by the Yahoo board. Yahoo yesterday responded to that letter, saying that while it doesn’t have any objections to a deal in principle, the current terms of Microsoft’s offer undervalues the company. It has also yesterday unveiled a new platform called AMP which it says will revolutionize online advertising and increase the value of the company. This platform will go live in the third quarter of 2008 and is touted as making the business of buying and selling online advertising much more efficient and user-friendly.
So far, then, Yahoo’s stance has been defiant in the hope that a third bidder (often referred to in the market as a “white knight”) will come along and make a better offer that the board feels able to recommend. However, some commentators have argued that, in the end, Microsoft is actually the only buyer with deep enough pockets who could buy Yahoo and also avoid competition issues.
For what is worth, I’ll put my neck on the line and have a punt on the likely outcome: at some point before 26th April and perhaps encouraged by Yahoo talking to potential white knights, Microsoft will up its offer slightly and the Yahoo board, now able to show that their tactics have produced some increased value for shareholders, will go ahead and recommend the Microsoft offer. Even if the merger goes ahead, however, it seems to me that Google is so far ahead (at least in things like search engine and online mapping) that even a merged Microsoft/Yahoo giant will struggle to make up the lost ground.
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