Microsoft, Yahoo agree on buyout price

Redmond nabs Yahoo's datacenters, Web properties, and ad platform for $47.2 billion

Editor's note: The following story is from InfoWorld's 2008 April Fool’s spoof-news feature package. It is not true. Enjoy!

After much internal debate and industry speculation, Yahoo today agreed to be acquired by Microsoft, adding $2.6 billion to Redmond's original offer of $44.6 billion on Jan. 31.

The agreement was reached near midnight last night, thus closing a contentious quarter for the Web company, one rife with in-fighting and power jockeying since Microsoft's initial offer.

Of the agreed $47.2 billion, $10 billion is in cash and the rest in stock, with $1.12 of Microsoft stock being swapped for each share of Yahoo stock, roughly a 12-cent-per-share premium over Yahoo’s $29.05 closing stock price on Monday.

The final price -- $33 per share vs. the original $31-per-share offer -- was less than Yahoo’s board wanted, sources said, but its recent “poison pill” actions such as providing all employees with four to 24 months of severance, based on their level in the company, should they be laid off in an acquisition, limited its ability to obtain a higher offer from either Microsoft or another firm such as Google, said Arbor Research analyst Jane Simons.

“The acquisition with Yahoo will better position Microsoft in the Web advertising market, as well as provide a strong platform for the delivery of Internet-based services to consumers and business users,” said Kevin Johnson, president of Microsoft's platforms and services division, which will oversee the Yahoo service offerings.

[ Follow the entire saga over Microsoft’s acquisition of Yahoo  in our special report. ]

Yahoo CEO Jerry Yang, who had publicly opposed the acquisition, said, “Being part of Microsoft will let the Yahoo vision reach further than we could have done on our own. And we will provide Microsoft the engine it needs to deliver on its Web-based services vision.”

Yang will join Microsoft as “chief Yahoo,” with specific duties to be determined later. Employees that Microsoft decides to retain will be offered an Xbox 360 game platform and a Zune music player as tokens of appreciation, in addition to cash grants and stock-option incentives for higher-level employees, Johnson said.

Although Yahoo had previously suggested a possible counteralliance with Google as a way of combating a Microsoft takeover, Google’s parallel announcement today that it would acquire the social media site Facebook indicates that Google saw little value in adopting Yahoo and was seeking to compete with Microsoft in new spaces, said Nigel Hydecombe, an analyst at Trapezoid, a U.K. research firm.

When the Yahoo acquisition is completed, Microsoft will transition MSN users to Yahoo and leave its service alone. Ironically, hackers hijacked the MSN DNS addresses shortly after the announcement and redirected all traffic to Google for about 90 minutes, before Microsoft could wrestle back control. Likewise, Yahoo’s DNS was redirected to its Chinese site, which has become a poster child for advocacy groups of corporate complicity in China’s stifling of free speech. Yahoo regained control in less than an hour.

It’s not yet determined which MSN functionality will be moved to the Yahoo site or what Yahoo functionality will be discontinued or changed. But Microsoft will transition to Yahoo’s advertising platform, which has done better than Microsoft’s, although neither has posed a significant threat to Google’s dominance in that sector.

“We expect a six-month transition planning process to make the final decisions,” said Steve Ballmer, Microsoft’s CEO.

Executives at both Microsoft and Yahoo indicated that Yahoo’s extensive datacenter holdings would contribute to Microsoft’s ability to offer Web-based services, such as the Web site hosting, Office add-ons, and Dynamics small-business on-demand apps that Microsoft has slowly been releasing under its Live brand.

Reaction from analysts and consumers ranged from disbelief to praise.

“This signals the death of Yahoo as it becomes part of Microsoft’s proprietary, awkward Live strategy,” said Mark Kelly, an analyst at The Buckeye Group research firm.

But Sara Ruiz, an analyst at RGB-Tech, said the deal was inevitable, given Microsoft’s mediocre efforts in the Web services and online advertising markets, the rising threat posed by Google, and Yahoo’s own loss of momentum in recent years.

“This couldn’t have played out any other way,” Ruiz said. “And that’s why the final price was not much more than Microsoft’s original offer.”

Ruiz said she expects most of the Yahoo’s senior management and board to quietly exit as the Microsoft takeover plan is implemented.

“We’ll see a lot of startups helmed by former Yahoo employees next year,” she predicted. But she thought the engineering and Web development staff would be showered with incentives to stay, including the ability to choose non-Windows computers if they wanted, as rival Google allows.

“This talent is what Microsoft bought, and the company can afford to be tolerant of a distinct Yahoo culture, at least for a while, because it is contained in the Silicon Valley," Ruiz said. “It can’t infect Redmond as easily from there, even though Redmond could stand a little infection.”

Trapezoid’s Hydecomb agreed that Microsoft would focus on retaining the engineering talent and see what it could take from the Yahoo culture “before absorbing it into the Microsoft collective,” but he was less convinced that the strategy would work.

“Microsoft said the same thing about its slew of small business applications such as Great Plains a decade ago, yet nothing really came out of them,” Hydecomb said.

Buckeye’s Kelly said he believes the acquisition was nothing more than a platform purchase to replace the anemic Microsoft MSN, ad platform, and search-engine businesses, and that once Microsoft learned to run them, it would not need to retain the Yahoo culture.

“This is a liver transplant, not a brain transplant,” Kelly said.

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Copyright © 2008 IDG Communications, Inc.

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