With so many people asking questions about why Microsoft might want to acquire Yahoo!, I wrote a short article explaining the possible reasons for the acquisition…
Yahoo + Microsoft? At $44.6 billion, Microsoft has offered to buy Yahoo at a 62% premium over its closing stock price before the announcement. In itself, a 62% is already incredibly expensive so in current market conditions what could possibly justify such a massive premium?
Perhaps the current market conditions are the very reason why Microsoft has grabbed this opportunity to buy Yahoo. 62% may seem like a large number but just three months ago, Yahoo was trading at a price higher than this premium. If not for a severe sell-off in the technology sector, Microsoft’s bid might have been laughable.
According to Microsoft, synergies through the increased scale, expanded research and development capabilities, higher operational efficiencies and more resources to focus on emerging internet user experiences will generate at least $1 billion annually. This does make sense as Microsoft’s and Yahoo’s market share in web search, 9.8% and 22.9% respectively, has so far failed to threaten Google’s dominance. Together, they might just be able to form a resemblance of competition to Google’s 58.4% market share.
Microsoft’s acquisition makes even more sense when looking at the two firm’s web properties. At the very end is a table of where Google, Yahoo and MSN properties appear within the top five positions of various web applications and portals.
By competing on a totally different field, Microsoft and Yahoo will be able to control web applications which can then be leveraged to maintain or even increase revenue from Microsoft’s core competency of office and operating software. On a different note, Google and Yahoo are also strong in different geographic areas, Yahoo in Asia and Microsoft in Latin America and Europe, and a merger would greatly expand their reach.
There is always an integration risk from failing to absorb its acquisition, even more so with large technology acquisitions where there is a graveyard of previous failures. However Microsoft has undergone careful thought and valuation before going through with its bid and with the online advertising market projected to double in the next three years, the return might just justify the risk.
Posted by jqwerty 
