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Yahoo! for Microsoft. Look out Google?

From Saturday's Globe and Mail

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In the end, Microsoft Corp. chief executive Steve Ballmer got tired of waiting.

Having watched for several years as Google Inc. solidified its place atop the online advertising world, Mr. Ballmer knew his best offence was to own Yahoo Inc., a combination that would make his biggest rival think twice.

Though Google is the leader in tailoring ads to specific online searches, Microsoft and Yahoo take a much broader approach, putting online ads in front of millions of Web surfers each day. It's nothing fancy, but it does attract a lot of dollars.

In Canada, the marquee spot on Yahoo's site sells for at least $25,000 a day and delivers at least a million sets of eyeballs.

Microsoft's impatience boiled over yesterday, resulting in an unsolicited $44.6-billion (U.S.) hostile cash and stock takeover offer for the struggling Internet search pioneer.

The deal would see two very similar companies join forces to take on Google in online advertising.

"This is like Coke buying Pepsi," said Scott Stewart, director of Toronto-based ad buyer Genesis Vizeum.

It will be the biggest deal yet for Microsoft, the world's largest software company, which got into the Internet business with its MSN service after Yahoo and the dominant Google.

Microsoft clearly decided it was going to have to forge a major alliance to challenge Google in the intensifying battle for the future of the Internet.

Though Microsoft and Yahoo had met at least twice previously to discuss a friendly merger, one where each side would share in the strategy sessions aimed at chipping away at Google, Microsoft was rebuffed.

Yahoo, it seemed, was determined to go it alone.

Mr. Ballmer was fed up with running third in the race for the billions of advertising dollars pouring into the Internet. With Yahoo buckling under the weight of dissatisfied investors and struggling to regain its footing, Mr. Ballmer saw his chance.

Yesterday, he pounced, just as Yahoo's chairman, Terry Semel, suddenly resigned. Mr. Ballmer laid a takeover deal at his rival's front doorstep that is designed to circumvent Yahoo's reluctant executives and appeal directly to its shareholders. Analysts say the deal will be difficult to refuse.

"This is a decision we have thought, and I personally have thought, long and hard about," Mr. Ballmer said during a morning conference call with investors. "And we are very, very confident it is the right path for Microsoft and Yahoo."

Mr. Ballmer telephoned Yahoo CEO and co-founder Jerry Yang on Thursday evening to inform him of Microsoft's intentions. In the morning, Microsoft released the stern letter it sent to Yahoo, urging the company's board to consider its proposal to purchase all outstanding shares of Yahoo common stock for $31 per share — a 62-per-cent premium on the stock's value at the close of Wall Street trading on Thursday.

"Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value inherent in our proposal," Mr. Ballmer said in the letter.

Yesterday Yahoo's board released a statement confirming it had received the offer and said it would consider the deal "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."

Both Yahoo and Microsoft trail Google in total Internet searches and in advertising revenues generated from keyword and search-based advertising.

However, there are still a number of hurdles for Microsoft before the deal can be completed. There is still a chance that Yahoo shareholders will reject Microsoft's offer and U.S. Justice Department officials are "interested" in reviewing competition issues raised by the deal.

Microsoft said that by combining, the two companies could save "at least $1-billion" a year in costs, while benefiting from economies of scale, accelerated innovation through the combination of their engineering talent as well as operational efficiencies.

An acquisition of this size marks a significant change in Microsoft's strategy, said IDC Canada software analyst Kevin Restivo.

"This is a bet-the-company move by Steve Ballmer," he said. "It shows that Google is the No. 1 concern for Microsoft today. Hence, the online space, be it advertising or Internet applications is first and foremost as far as expansion plans go."

Microsoft has been trying to beef up its online advertising business since 2005, but it has been a rocky road for the company, based in Redmond, Wash. In December, 2005, Microsoft was embarrassed when it lost out to Google in a race to partner with Time Warner's America Online business. Last April, the company's expansion plans were frustrated when Google outbid Microsoft to purchase DoubleClick Inc., one of the most prominent display ad services online.

Recently Microsoft has stepped up its efforts to build out its online services division, most notably with last year's $6-billion acquisition of the online ad brokering firm aQuantive Inc. and the company's $240-million deal to purchase a stake of the social networking company Facebook Inc.

Yahoo has faced criticism in the past for the way it has handled its core Web search and advertising businesses, which ultimately led to the shakeup that landed Mr. Yang in the top post.

Jeffrey Lindsay, senior analyst for the Internet at Sanford C. Bernstein in New York, said Yahoo shareholders would be smart to accept the offer since it will be difficult for the company to reach a $31 stock price based on its own organic growth.

"From a pure investor perspective we think it's an excellent deal," he said. "But possible resistance might come from Yahoo management because Mr. Yang and [co-founder] David Filo own a lot of the shares personally, and secondly there's the possibility of someone else stepping in and making a counter offer."

Advertisers are likely to look more favourably upon a Yahoo-Microsoft alliance, since a consortium of their paid search businesses would command about 30 per cent of the market and reach a much broader combined audience, he said.

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