Analysis: Yahoo turndown of Microsoft offer

By Mickey Alam Khan

February 12, 2008

Yahoo has made considerable strides, including an improved Yahoo oneSearch

Yahoo Inc.’s rejection yesterday of Microsoft Corp.’s $44.6 billion offer for the Internet giant may buy some more time for mobile companies worried about losing a key customer or partner.

A combination of Yahoo and Microsoft would certainly have limited competition in at least five areas that affect mobile – advertising, search, email, messaging and operating platforms. But the Yahoo rebuff is also another breather for the overall interactive marketing business.

“After careful evaluation, the [Yahoo] board believes that Microsoft's proposal substantially undervalues Yahoo including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments,” a statement from Yahoo said.

“The board of directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders,” Yahoo said.

As expected, Microsoft's response was quick -- and pugnacious.

Microsoft may use its dominance in operating systems and online browser to parlay that across other Internet offerings

"It is unfortunate that Yahoo has not embraced our full and fair proposal to combine our companies," Microsoft said in a statement. "Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties.

"We are offering shareholders superior value and the opportunity to participate in the upside of the combined company," the statement said. "The combination also offers an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market.

"A Microsoft-Yahoo combination will create a more effective company that would provide greater value and service to our customers. Furthermore, the combination will create a more competitive marketplace by establishing a compelling No. 2 competitor for Internet search and online advertising."

Microsoft had previously indicated to the media that it may appeal directly to Yahoo shareholders. So it looks set to act on that line of thinking.

“The Yahoo response does not change our belief in the strategic and financial merits of our proposal,” Microsoft said in the statement.

“As we have said previously, 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,” the company said.

It is quite likely that Yahoo is holding out for more than the $31 a share that Microsoft is offering. But doing nothing is not going to placate Yahoo shareholders who have seen their stock plunge as the company struggles to keep pace with Google in search.

Microsoft’s play for Yahoo was strongly opposed by Google Inc., the world No. 1 in online searches (see story). It is an irony, because even combined Microsoft and Yahoo are nowhere near Google’s sheer dominance of search – three out of five searches conducted online are on Google.

But is a fear that Microsoft may use its dominance in operating systems and online browser to parlay that across other Internet offerings that worries most opponents of the unsolicited offer.

On the mobile side, Yahoo has made considerable strides, including an improved Yahoo oneSearch search engine and Yahoo Go 3.0 platform. Microsoft’s mobile presence is most obvious with its Windows Mobile 6 operating system and Windows Live Search application.

There is media speculation that Yahoo might seek a partnership with Time Warner’s troubled AOL brand or even outsource its search functionality to Google.

Meanwhile, Microsoft is busy wooing mobile marketers at this week’s GSMA Mobile World Congress organized in Barcelona, Spain, by wireless carrier lobby GSM Association.

The Microsoft booth at the show includes allied brands such as CoPilot Live 7, which offers voice-guided GPS navigation on Windows Mobile devices; Formotus Inc., whose software lets firms generate and deploy business applications to Windows Mobile devices; and SpB Software House.

Also in the Microsoft booth at Barcelona’s Fira Convention Center are Microsoft Connected Services Sandbox, Microsoft Content Access & Protection Group, Microsoft Unlimited Potential, MSN Direct, MSN Mobile and Windows Live for Mobile.

Robbie Bach, president of the Microsoft Entertainment and Devices Division, is at Mobile World Congress with his colleague Pieter Knook, senior vice president of mobile communications business at the company. Microsoft executives are also participating in several panel discussions.

Back home, Microsoft chairman Bill Gates yesterday was in San Jose, CA, addressing the 2008 Microsoft Office System Developer Conference. Mr. Gates announced new software and services for developers based on the Microsoft Office package.