I almost feel stupid quoting this (like anyone hasn't heard)...
I am writing on behalf of the Board of Directors of Microsoft to make a proposal for a business combination of Microsoft and Yahoo!. Under our proposal, 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. Our proposal is not subject to any financing condition.
Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008. The implied premium for the operating assets of the company clearly is considerably greater when adjusted for the minority, non-controlled assets and cash. By whatever financial measure you use - EBITDA, free cash flow, operating cash flow, net income, or analyst target prices - this proposal represents a compelling value realization event for your shareholders.
What's interesting here isn't that Microsoft wants to acquire Yahoo, that's been rumored for years. What's interesting is how much they are willing to pay. Yahoo's shares closed at 19.18 yesterday while Microsoft offered a staggering 31 per share as an acquisition offer.
To me this is Microsoft making an offer that Yahoo can't refuse. I mean no offense towards the people at Yahoo but they are in a mess and there aren't many investors who think they can dig themselves out of it. Even if they can it will take a massive effort to get Wall Street's faith back. Microsoft is handing them everything they'd have to work for on a silver platter. I'm sure there are employees who will resist this but I can't imagine there's a yahoo investor out there who isn't jumping for joy right now.
Anyway, the implications here are pretty vast and I certainly can't list them all in one post even if I were prepared to do so. But here's a list of quick reactions...
Ads: This is what everyone is focusing on and Microsoft is clearly trying to build a massive advertisement business based on acquisitions. Technology companies are essentially the sum of their employed talent so acquisition has never been a big thing in the tech sector but my understanding is that its a huge thing for Ad agencies. Customer loyalty is a big deal in that market and changing your ad agency is rarely done (in the grand scheme of things). So if Microsoft can buy up the ad market around Google and use large properties as enticements they might be able to beat Google without beating Google's technology. People forget how many small blog ads it takes for Google to compete with Microsoft getting all the big fish.
Search: Microsoft's search stinks and has only risen slightly in share because of money spent on marketing. I don't want to portray this blog as being of great importance but it's publicly on the Internet and both Google and Yahoo indexed it over a month ago. Live.com still hasn't even found it. As for relevance, that situation is just as bad. To test I put in a few political candidates and ran into a perfect example with John McCain. See the Live results here and the Yahoo results here. The Microsoft site lists all the individual subdirectories of Mr. McCain's site as if they were different sites. So california.johnmccain.com is 3, lousiana.johnmccain.com is 4, michigan.johnmccain.com is 5 and so on. The Yahoo results on the other hand list his myspace page, his wikipedia page, etc... Bottom line, Microsoft Search stinks and could really use Yahoo's help (and maybe together they could at least get within striking distance of Google).
Economies of Scale: Lets be honest here, Yahoo and Microsoft are doing a lot of the same things. It only makes sense to collaborate on those things and save some money doing it. Even if they aren't going to merge they should be looking at collaboration on things like data centers because it allows them to compete against Google far more effectively.
Just Plain Scale: Both Microsoft and Yahoo have become media companies at this point and both fund (in one way or another) a surprising amount of content for their individual networks (MSN and Yahoo respectively). I think it would be foolish to kill either one of those networks off but allowing that information to co-mingle will double the amount of content they have to offer and hopefully make both sites more appealing.
Web 2.0: Remember this is an area that Steve Balmer has specifically mentioned as a goal for Microsoft in the next few years. Yahoo has been very successful at acquiring companies that fit the description and I'm sure Microsoft has at least noticed that (though their obsessive need to brand will probably screw this up as Flickr becomes MSN Photos and fans go elsewhere)
That's all I have for right now. I really do think this merger is pretty much inevitable. I'm honestly not sure if I think its the best thing to do for either company yet. But I also haven't gotten to read much of the coverage yet so its possible some of it will open my eyes to something I didn't consider.
Whatever the case this is certainly big news.