Why Microsoft Should Bid Again — and Yahoo Should Accept

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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