Microsoft makes $44.6 billion bid for Yahoo

Microsoft (MSFT, news, msgs) stunned investors and Internet users around the world this morning by making an unsolicited $44.6 billion bid to buy rival Yahoo (YHOO, news, msgs).

The offer was made last night and announced this morning. The $31-a-share offer is a 62% premium over Yahoo's closing price of $19.18 on Thursday. Yahoo shares soared on the news, jumping 48% on the day to $28.38.

Microsoft was down 6.6% to $30.45. It was the worst performer among the 30 stocks in the Dow Jones Industrial Average today. (Microsoft is the publisher of MSN Money.)

The Dow closed up 93 points, 0.7%, to 12,743. Microsoft's loss trimmed about 17 points off the index. The Nasdaq Composite Index was up about 24 points, 1%, to 2,413. The Standard & Poor's 500 Index was up 17 points, 1.2%, to 1,395.

It was the fourth day in five that saw the major averages move higher. And it was the second straight week of gains for the market.

The Microsoft offer is clearly a bid by Microsoft to strengthen itself in its battle against Google (GOOG, news, msgs) in Internet search and related services. Google was down 8.6% to $515.90 after its earnings report Thursday night disappointed investors.

Year of talks

Microsoft's bid came after more than a year of on-and-off talks between the two companies about a merger or some sort of business alliance. Microsoft CEO Steve Ballmer spoke with Yahoo CEO Jerry Yang about the offer late Thursday.

Yahoo has been under growing pressure to do more to push its struggling stock price higher. Thursday's closing price represented a 56% decline from a high in January 2006.

Yahoo's only comment this morning was to acknowledge receipt of the offer.

The company's board "will evaluate this proposal carefully and promptly in the context of Yahoo!'s strategic plans and pursue the best course of action to maximize long-term value for shareholders," a company statement said.

• Read more: It's all about Google

The big jump in Yahoo's stock price signals that Wall Street believes a deal will happen. But the deal and its timing are far from certain. Negotiations could drag out for months, and the combination stands to face significant regulatory hurdles from antitrust officials in the United States and in the European Economic Union.

In fact, the U.S. Department said it was "interested" in reviewing antitrust issues associated with proposed deal.

'Massive' pressure from Google

"Microsoft is under massive pressure to expand its Internet business to fend off competition from rivals such as Google, and this deal shows how desperate they are," Thomas Radinger, a fund manager at Pioneer Investments in Munich, Germany, told Bloomberg News. "It's a huge gamble, as the price is very steep, and it will take years to successfully integrate such a massive acquisition."

• What a Microsoft-Yahoo deal would mean

"Yahoo is vulnerable," Jordan Rohan, an analyst at RBC Capital Markets in New York, told Bloomberg. "Investors are losing patience with the Yahoo management team."

"We believe a deal would make strategic sense," Banc of America Securities analyst Brian Pitz wrote clients this morning. "Microsoft/Yahoo combination would be a more formidable competitor to Google, which has been winning the competitive battle with Microsoft in Online Services to date." But he was concerned about the antitrust issues.

• Talk back: What do you think of Microsoft's bid for Yahoo?

Analysts were generally bullish on the deal. "It reflects the difficulties that Yahoo faces," Thomas Burnett, director of Wall Street Access, told MSN Money. "They're looking at a very powerful competitor -- they're a No. 2 -- the stock is just going to trade in a $17-to-$22 area for a heck of a long time. There wasn't a very exciting future there."

A Microsoft-Yahoo combination would offer strong competition to Google, he added. "A lot of advertisers say they have to be on Google and throw a few crumbs at the other guys. If you have a combined Microsoft-Yahoo, you really have a serious alternative."

"One of the biggest challenges facing MSN and potentially Yahoo is the lack of scale in terms of search traffic compared to Google," JPMorgan analyst Imran Khan wrote this morning.

"We believe that a potential combination between the two companies could solve this issue and close the gap with Google from a search inventory and advertiser perspective."

The combination may save $1 billion a year, partly "through elimination of redundant cost," Microsoft said today in a statement. The company has almost 80,000 employees to Yahoo's 14,000. This week, Yahoo announced plans to cut 1,000 jobs, 7.1% of the workforce.

One critic was blunt. "With Microsoft paying a full price for a broken business where there's not accelerating organic growth, I can't make that work at all,'' Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis, told Bloomberg News.

Stronger online presence

Microsoft, like Yahoo, has faced an uphill battle against Google, and has invested heavily to build its own search engine and advertising technology. Last year, Microsoft spent $6 billion to acquire the online advertising specialist aQuantive. Microsoft's online services unit has been growing but remains unprofitable.

Analysts say Microsoft needs a strong footprint in the online space not just to grab advertising revenue, but as a way to deliver its core software offerings in the future.

Google has launched free online alternatives to Microsoft's spreadsheet and word processing software in recent months.

The deal will be looked at carefully

The deal would probably get close scrutiny from the Justice Department because Microsoft and Yahoo have large market shares in Internet traffic, said Jim Ponsoldt, Joseph Henry Lumpkin Professor of Law at the University of Georgia and an expert in antitrust law.
But a Bush administration's Justice Department probably "would look for a reason not to oppose the deal," he said.

There are relatively few barriers to entry in the business, and the administration generally has an anti-regulation bias, he said.

A big payoff for Yahoo's founders

If a deal at $31 a share were to go through, Yahoo's founders -- Yang and David Filo -- would realize some $1.6 billion and $2.4 billion before taxes, respectively, The Wall Street Journal said. Those estimates don't include proceeds from exercising options and from shares controlled indirectly.

In 2000, before the dot-com bust, The Journal said, Forbes magazine estimated Filo's net worth at $6.5 billion and Yang's at $6.4 billion.

Yang and Filo started Yahoo in 1994 as graduate students at Stanford University and incorporated the company in 1995.

By Charley Blaine and Elizabeth Strott, MSN Money