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Although Yahoo! Looks Pretty Boxed In by Microsoft, It Could Try For More Money

Microsoft this morning made a $44.6 billion hostile bid for the floundering Yahoo!

Microsoft this morning made a $44.6 billion hostile bid for the floundering Yahoo, striking at a point when it has become evident to all and sundry that Yahoo doesn’t have a pray of turning things around on its own let alone getting competitive.

Yahoo’s first official reaction was basically to say it’ll think about it. It said it would evaluate the offer “carefully and promptly in the context of Yahoo’s strategic plans.” It did not give a timeframe for a response.

Although it looks pretty boxed in, it could of course try for more money.

Microsoft’s move throws open the door to rival bids, but Microsoft thinks Google’s hands are tied. Its market share would raise insuperable antitrust issues, Microsoft said, to a counter-offer.

Yahoo is the most visited site on the Internet, though it has failed to monetize its popularity and has lost share in search, and Microsoft, which has the same problems, wants the consumer traffic.

“Scale matters,” it said.

Projections peg the online advertising market being worth nearly $80 billion by 2010 and Microsoft flat out says it can’t get competitive on its own.

Microsoft has been trying to bring Yahoo to the negotiating table for 18 months in an attempt to level the playing field with the increasing dominant Google.

According to the offer letter Microsoft CEO Steve Ballmer sent Yahoo last night, Yahoo rejected a merger proposal from Microsoft last February saying, “Now is not the right time from the perspective of our shareholders.”

Yahoo, he said, was gambling on the “potential upside if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment.”

As Ballmer observed, “A year has gone by, and the competitive situation has not improved.”

Microsoft is offering $31 dollars a share, a 62% premium to Yahoo’s beaten-down closing price of $19.18 yesterday.

Its opening bid, its first hostile bid ever, is a combination of cash and stock. Microsoft said Yahoo shareholders could pick which they wanted, expecting a 50-50 split.

Microsoft shrugs off any regulatory hurdle for itself and expects the deal, if consummated, to close in the second half.

The price is a monster even for Microsoft, whose largest acquisition to date has been the $6 billion aQuantive deal, and there are of course doubts that Microsoft can get it back. There are also real integration risks.

Microsoft thinks the two companies together offer the advertising market a significant alternative to Google, arguing economies of scale, combined R&D, accelerated innovation and operational efficiencies. It estimates at least a billion dollars a year in annual synergy from the merger.

It brushes aside the integration risks and having had more than a year to think about it, says it has a plan and a process that includes employees of both companies. Among other things, it intends to offer “significant retention packages to Yahoo engineers, key leaders and employees across all disciplines.”

Yahoo Tuesday lowered its 2008 outlook, warning it faced “headwinds” and possible spending cutbacks because of a weakening economy, its only apparent solution being to lay off about a thousand people from its swollen staff.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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