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Redmond, Washington-based Microsoft, the world's largest software company, has made an offer of cash and  stock to purchase Internet pioneer Yahoo for $44.6 billion, a 62 percent premium over the Sunnyvale, California-based firm's Thursday stock price of $19.18, representing $31 a share in a move that would reshape the online sector dominated by Google, Microsoft announced Friday. A combined Microsoft and Yahoo would be positioned more strongly to compete in a market that Microsoft said in a Friday statement "is increasingly dominated by one player," by creating efficiencies expected to save about $1 billion annually. "Great Respect" For Yahoo Microsoft's chief executive Steven A. Ballmer sees advantages in a Yahoo acquisition. "We have great respect for Yahoo!, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market," Ballmer said in the statement. " Microsoft has proposed a plan for combining the two firms that would offer incentives to retain Yahoo employees, a combination Ballmer said would benefit shareholders and customers. "We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners," he said. Friday's proposal, which appears to have been unsolicited, would see Microsoft working with Yahoo's board of directors to scrutinize and revue a takeover. "We expect the Yahoo Board to engage in a full review of our proposal," Ballmer wrote in a Thursday letter sent to Yahoo's board of directors. To Tackle Google Dominance Google holds a commanding position atop the Internet search and online advertising markets, with recent figures showing its share of the search business nearing 60 percent, more than triple either Yahoo's 17.7 or Microsoft's 13.8 percent shares. Combining with struggles Yahoo's chief executive Jerry Yang has faced trying to turn the firms fortunes around since he was appointed last summer, recent poor share prices dropping to three-year lows and the announcement that it would lay off 1,000 jobs appear to have brought on Friday's offer from Microsoft. A dark forecast for 2008 earnings has also disappointed investors. Microsoft said it expects its purchase of Yahoo, if excepted by board members and approved by regulators, could be finalized by the second half of 2008. There is no formal indication yet as to how the offer will be met by Yahoo board members, who could "elect to receive cash or a fixed number of shares of Microsoft common stock," according to the Microsoft statement. The proposal for a combination of Microsoft and Yahoo is not subject to any financing condition and "represents a compelling value realization event for your shareholders," Ballmer told Yahoo board members in the letter. Earlier Talks Ended Without Deal Friday's offer is not the first time Microsoft has tried to work with Yahoo. "In late 2006 and early 2007, we  jointly explored a broad range of ways in which our two companies might work together," Ballmer said in his letter to Yahoo board members. Those talks were aimed at aligning the companies either through a commercial partnership or a merger in order to "create a more effective competitor in the online marketplace," which Ballmer said, "you rejected." Ballmer quoted Yahoo as having replied that the time was not right for an acquisition. "Now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction," Yahoo is quoted as saying in reply to Microsoft's earlier offer. Yahoo appears to have turned away Microsoft's earlier offer in the belief that it would improve and grow stronger over time, however Ballmer now says "a year has gone by, and the competitive situation has not improved." It appears that any notion of a mere partnership with Yahoo is no longer possible and that only a merger would be acceptable to Microsoft. "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," Ballmer said. Microsoft in Strong Position Ballmer pointed to strong revenue growth as a factor making the Microsoft proposal attractive to Yahoo. "Microsoft common stock represents a very attractive investment opportunity for Yahoo's shareholders," said Ballmer. Over the past three years Microsoft has seen its revenue increase by 15 percent and earnings by 26 percent, along with a 35 percent return on equity, figures which Ballmer noted in his letter as, "significantly outperforming the S&P 500." Microsoft see its proposal as a way to create a more competitive company through the benefits of scale, and appears to feel that the timing is right now, during what it calls "a time of industry consolidation and convergence." Microsoft notes the importance of the increasingly lucrative online advertising market in its statement, citing estimates predicting growth in the area "from over $40 billion in 2007 to nearly $80 billion by 2010." The company co-founded by Bill Gates and Ballmer notes four areas in which a combined Microsoft and Yahoo could excel, and through which it expects to generate at least $1 billion annually :  | "Scale economics driven by audience critical mass and increased value for advertisers." | | | "Combined engineering talent to accelerate innovation." | | | "Operational efficiencies through elimination of redundant cost." | | | "The ability to innovate in emerging user experiences such as video and mobile." | It his letter to Yahoo board members Ballmer notes the additional benefit of scale the combined firms would have in "capital costs for search index build-out." Microsoft has developed a plan that would see "employees of both companies [...] focus on the integration of the combined business," and offer "significant" retention packages aimed at keeping Yahoo employees. Microsoft Proposes $44.6 Billion Purchase of Yahoo Microsoft notes "our enthusiasm" with the proposal unveiled Friday, and Ballmer clearly has Google in mind in his letter to Yahoo board members "Today there is only one [...] competitor at scale [and] the market is  increasingly dominated by one player who is consolidating its dominance through acquisition," Ballmer wrote. He also sees a successful acquisition as a way to focus more research and development resources on "a single search index and single advertising platform," and as a way to "create a leading global technology company with exceptional display and search advertising capabilities," according to his letter to Yahoo's board. Microsoft's chief software architect Ray Ozzie sees a combined Microsoft and Yahoo as being able to offer users new services. "Our lives, our businesses, and even our society have been progressively transformed by the Web, and Yahoo! has played a pioneering role by building compelling, high-scale services and infrastructure. The combination of these two great teams would enable us to jointly deliver a broad range of new experiences to our customers that neither of us would have achieved on our own," Ozzie said. Kevin Johnson, Microsoft's president of platforms and services, sees the merger as an important step in preventing Google from becoming too dominant. "The industry will be well served by having more than one strong player, offering more value and real choice to advertisers, publishers and consumers," Johnson said. Proposal Reactions Run Spectrum Among members of the popular online discussion forums operated by WebmasterWorld, a community of mostly technically savvy webmasters and search engine marketing (SEM) professionals founded by chief executive Brett Tabke, reaction to Friday's proposal by Microsoft was mixed. Some members worried about the amount of time search leader Google will have in the interim should the acquisition of Yahoo go through. "Even if they go ahead with the deal, it's expected to complete in second half of 2008. Google still has at least a year's time," one WebmasterWorld member, using the handle "mil2k" wrote. "Whether it will help Microsoft get more market share in search industry is something only time will tell," the member added. Another member sees Microsoft's proposal coming at an opportune time. "The timing is perfect. Yahoo [stock] is way down, and even Google disappointed. No investors can seriously expect that Yahoo [shares] will improve to more than $31 in the next year or so," wrote a member using the handle "walkman." Others worried that the merger would limit the number of choices available to consumers, such as a member using the alias "tracking90". "There will be fewer options for advertisers in both search and display [advertisements]. Microsoft will have an easier time setting its prices higher because there will be less places for advertisers to turn," the member wrote. "I'm extremely nervous about the buyout," they added. A WebmasterWorld member using the handle "foxtunes" wondered how the two firms might handle the matter of branding their many Web properties and services. "I wonder if they'll keep the email and search as separate entities or blend them into a Live-Yahoo Goliath," they wrote. By proposing to buy Yahoo Microsoft is clearly taking aim at Google, but as least one WebmasterWorld members doesn't see even the combined firms as being able to overtake the search giant Google. "As for knocking Google off their throne, I do not think that any of their current rivals will do it. It will be some little startup with really fresh thinking," wrote a member using the handle "graeme_p". In a press release Yahoo said that it is considering Microsoft's proposal, and that its board of directors "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 United States Justice Department spokeswoman said the agency is "interested" in looking into any antitrust concerns related to the Microsoft proposal, according to wire service reports. Should the acquisition go through it is expected to face additional scrutiny from Congress and other enforcement agencies. The deal would be one of the biggest in American corporate history, and the largest ever among U.S. technology firms. In June 2007 Yang replaced former Yahoo chief executive Terry Semel in an executive reshuffling, followed by a 100-day review and the implementation of new corporate goals, however investors have not been convinced, and following Wednesday's poor fourth quarter earnings report and the layoff announcement came Thursday night's announcement that Semel is stepping down from the non-executive chairman position he took in June. Sramana Mitra, a technology entrepreneur in Silicon Valley was saddened at the possibility of a Yahoo takeover. "It is the sad end of an era, for sure. It is also a sad ending for a company of Yahoo!'s stature," Mitra wrote in a recent article in Forbes. BBC News website business editor Tim Weber sees Google in the driver's seat regarding the proposed acquisition. "If Yahoo agrees to the deal with Microsoft, it will be a shotgun marriage, but it will be Google holding the shotgun," Weber wrote in a recent BBC News article. If Yahoo board members don't like proposed offer, Microsoft could initiate a rare proxy contest to bring Yahoo's directors to the bargaining table at Yahoo's forthcoming annual meeting. In Friday afternoon trading Google's shares fell 8.8 percent to $514.87, while Yahoo shares climbed by more than 45 percent. Microsoft shares fell 6.9 percent. Related Links:
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5:40 pm on Feb. 1, 2008 (utc 0)