REDMOND, WA — Microsoft and Yahoo may be headed for a shotgun wedding. On Friday, after the world’s second-most-popular search engine tersely and obtusely declined Microsoft’s request for its hand, Chief Executive Steve Ballmer said his company would pursue a hostile takeover if necessary.Financial markets and pundits erupted into deafening chatter about Microsoft’s $44.6 billion offer for Yahoo, which in December ran a distant second to Google in the search-engine popularity contest. Together, Yahoo and Microsoft’s MSN/Windows Live Search (which is third in the category) gathered 2,269,587 searches, barely topping half of Google’s 4,062,536, according to research and metrics firm Nielsen Online. Google enjoyed 56.3-percent of the search market in December, compared to the 31.5-percent share Yahoo and MSN/Windows Live garnered together.
Yahoo has declined earlier proposals from Microsoft. This time, however, Ballmer seems intent on capturing the object of his affection — especially since Google beat Microsoft out of a bid for advertising network DoubleClick. That deal passed U.S. Federal Trade Commission scrutiny late last year, but it still has hurdles to surmount in the European Union.
If a Microsoft/Yahoo deal is consummated, it could create the kind of threat Google most likely dreads. Both Yahoo and Google have suffered financial setbacks in recent quarters (Yahoo’s 2007 profit fell 12-percent over 2006’s), and Microsoft continually has struggled to capture a larger share of the lucrative internet search and advertising markets. A merger of the second- and third-place candidates — combining the name recognition in the Web sphere and existing database of Yahoo with the marketing and technology muscle of desktop-software and Web-browser giant Microsoft — would marry the complimentary strengths of two competitors into one unified effort to shove the biggest dog in the yard off the porch.
According to Nielsen Online, Google’s audience of 264,872 unique users daily barely outpaces Microsoft’s network-wide 201,363. With the addition of Yahoo’s 197,898, Microsoft would gain an advantage.
“If Microsoft and Yahoo join forces it will be the most important event in the internet industry this year, without a doubt,” said Ken Cassar, vice president for industry solutions analytics at Nielsen Online. “The combined entity would be visited by 86-percent of U.S. internet users, account for 15-percent of all time spent online, and represent 59-percent of online display ad impressions sold, really the most significant revenue generator today for most online publishers.
“Even though they have significant audience overlap and a combined search share that would not catch Google’s, they could be positioned to create the next generation of ad networks — one that rivals Google/DoubleClick: a diverse environment made of up e-mail, search, original content and consumer-generated media where advertisers could maximize their buys over two of the most trusted online brands.”
According to a Microsoft press release, the Web advertising market is anticipated to increase from a 2007 level of around $40 billion to $80 billion by 2010. Ballmer indicated his company intends to pursue a growing share vigorously.
“Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition,” Ballmer wrote in a letter to Yahoo’s board of directors. “Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers, and publishers… While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo that we are proposing.”
At $31 a share, the dowry Ballmer proposed represented a roughly 60 percent premium over Yahoo’s Thursday-closing stock price of $19.18. Yahoo stock has fallen 43-percent since last October, which leaves Ballmer with quite a large bargaining chip in the minds of investors.
Any merger between Microsoft and Yahoo would be subject to oversight for antitrust and other regulatory issues. Google already has raised objections to the idea, accusing Microsoft of attempting to stifle competition.
“Microsoft has frequently sought to establish proprietary monopolies and then leverage its dominance into new, adjacent markets,” Google Chief Legal Officer David Drummond warned in a statement released on Sunday. “Could the acquisition of Yahoo allow Microsoft — despite its legacy of serious legal and regulatory offenses — to extend unfair practices from browsers and operating systems to the internet?”
Predictably, Microsoft fired back with a “pot-calling-the-kettle-black” response.
“The combination of Microsoft and Yahoo will create a more competitive marketplace by establishing a compelling number-two competitor for internet search and online advertising,” Microsoft General Counsel Brad Smith wrote in a statement also released on Sunday. “The alternative scenarios only lead to less competition on the internet.”
Indicative of just how badly Google wants to squelch any potential marriage between Microsoft and Yahoo, The Wall Street Journal’s website on Sunday reported that Google CEO Eric Schmidt called Yahoo CEO Jerry Yang on Friday to offer his support. According to the Journal, the offer didn’t include a counter-bid but may have included offers to support other suitors or provide revenue sharing based on advertising partnerships. The paper also said AT&T, Time Warner Inc. and News Corp. showed no interest in entering the bidding.
News of the sparring affected Monday’s financial markets: Yahoo shares jumped 77 cents to $29.15 in morning trading, and Microsoft gained 5 cents to $30.50. Google shares fell $10.27 to $505.63.
