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Summary:

Now that Yahoo co-founder and CEO Jerry Yang has finally stepped aside, removing what many saw as one of the main barriers to bringing the two companies together, Microsoft should re-ignite acquisition talks with the company. But that’s not the only reason. There are plenty of […]

ballmer-ap-photoNow that Yahoo co-founder and CEO Jerry Yang has finally stepped aside, removing what many saw as one of the main barriers to bringing the two companies together, Microsoft should re-ignite acquisition talks with the company. But that’s not the only reason. There are plenty of other good ones why it should do so — and why Yahoo should accept. (full story below)

After his last effort to strike some kind of a deal with Yahoo ended in failure, Microsoft CEO Steve Ballmer said categorically that the software behemoth had no interest in making another acquisition bid for the troubled web company. Was he just bluffing? That should become obvious relatively soon, now that co-founder and CEO Jerry Yang has finally stepped aside, removing what many (including Ballmer himself) saw as one of the main barriers to bringing the two companies together. But that’s not the only reason Microsoft should re-ignite acquisition talks with the company. There are plenty of other good ones why it should do so — and why Yahoo should accept.

One of the biggest reasons Microsoft should take another kick at the Yahoo can is obvious: Relatively speaking, it would cost them far less. Even if Microsoft offers a hefty premium (last time the original offering price of $31 a share was a 62-percent premium, and the software maker later boosted that to $33 a share), it should be able to acquire Yahoo for somewhere in the $18-$20 range. That’s a savings of more than 35 percent. If Yahoo was worth $45 billion in February, surely it’s worth $25 billion to Microsoft now. That’s barely more than a year’s worth of cash flow for the company.

The second major reason Microsoft should reconsider a deal is that the Redmond giant is still a distant third in the search game, and the longer it spends trying to solve that problem on its own, the worse it gets. Yahoo’s revamped search and advertising platform has its flaws, but it’s light years ahead of anything Microsoft has, or will have anytime soon. That’s worth paying for. The same rationale applies to Microsoft’s web content strategy, such as it is. Yahoo has tons of content and services, and plenty of paying customers, two things Microsoft badly needs.

And why should Yahoo accept such a bid? At this point, it really has no choice. In fact, not accepting a reasonable bid if one were to emerge would arguably be a dereliction of duty on the part of the company’s board of directors, and they are already skating on thin ice. What other options does Yahoo have right now? A merger of some kind with AOL? That would be a massive waste of shareholders’ money and time. Roping together two struggling companies is no way to create a winner. And while hooking up with Microsoft isn’t a sure bet either, such a move would offer a far better chance at success than a Yahoo-AOL tie-up. At this point, anything would be better than Yahoo on its own. The company has lost the confidence of both investors and a growing number of users, and it needs to do something — fast.

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  1. Jerry has done well to not sell Search over to MS. To your point, yahoo search finds me everything i need to find, all that the new CEO needs to do is to focus on gaining ground on Google search and all the negative press will disappear, stock price will rise and give yahoo the breathing room to re-tool.

  2. Marshall Kirkpatrick Wednesday, November 19, 2008

    Mathew Ingram guest post, damn, why didn’t I think of that? Good to read your thoughts over here, Mathew.

  3. They’re not interested (http://www.reuters.com/article/newsOne/idUSTRE4AI5PD20081119).

    It only melts the YHOO stock down and ironically YHOO is following the same path as Sun. Once a darling, now there isn’t much to talk about ( Sun : Java, Servers, Yahoo : User community, Search Tech, which is better than MSFT, but not GOOG ). So its for dogs to salvage the flesh and blood, from bones. Its (more) bleeding time.

  4. There will be no other Microsoft bid for Yahoo. Next time Ballmer publicly admits to buy Yahoo, everything will be already negotiated (and settled) with major selling shareholders. The times for stock games are definitely over.

    Write this down.

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  7. But do they really need to, now? Especially since the primary Yahoo Search engineer has resigned and joined Microsoft.

  8. Thanks, Marshall.

    And @OK, I think you are probably right. Microsoft has the luxury of waiting now — and every time Steve says they aren’t interested, the share price goes down.

  9. Aol and Yahoo together, fell on the floor laughing, 2 companies that have given me fits over the years, many years ago in internet years though. I have given up on using yahoo ppc, just a waste of time IMHO.

  10. It is easy to see that the things you mention Microsoft getting from the deal, a cheaper price for something they would have paid for earlier, and the search solution it has consistently failed to build. And of course the Yahoo shareholders get cash out of a transaction. But what does Yahoo get from the deal other than that? What magic does Microsoft have that will make Yahoo’s assets more productive for Microsoft than they would be on their own?

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