Microsoft-Yahoo VS Ecomony Slowdown; Microsoft offers $44.6 bln for Yahoo; targets ‘dominant player’

Feb.01, 2008 in Market Outlook

Microsoft offers $31-share, $44.6 billion, for Yahoo

Cash-and-stock offer, at 62% premium, targets ‘one dominant player’

By Aude Lagorce, MarketWatch

Last Update: 8:44 AM ET Feb 1, 2008

WASHINGTON (MarketWatch) — Microsoft Corp. on Friday offered to buy search
engine operator Yahoo! Inc. for $44.6 billion, in an effort to better compete
with online advertising giant Google Inc.

Microsoft (MSFT) said its “compelling” offer of $31 a share, half cash and half
stock, represents a 62% premium on the closing price of Yahoo (YHOO) stock
Thursday.

In a brief statement, Yahoo said its board of directors “will evaluate this
proposal carefully and promptly in the context of Yahoo’s strategic plans and
pursue the best course of action to maximize long-term value for shareholders.”

Yahoo shares jumped 57% to $30 in preopen U.S. trades. Microsoft shares were down
5%, while Google (GOOG) stock dropped 6%.

“This is Microsoft declaring who the enemy is and taking a bold move to address
it,” said David Mitchell, senior vice president in the technology-research
practice of U.K.-based consultancy Ovum.

“Google poses a clear long-term threat to Microsoft’s business….But Microsoft
and Yahoo together would make a significant competitor who could fight back, “he
said.

Google dominates the Internet-search business with a 56.3% market share,
according to the latest report by ratings agency Nielsen Online. Yahoo! (17.7%)
and Microsoft (13.8%) combined for a market share of 31.5% in December, Nielsen
said.

Microsoft has been actively seeking ways to boost its presence in the
Internet-search market and pursued an acquisition of Yahoo last year, but Yahoo
balked.

The sharp decline in Yahoo’s stock - it recently touched its lowest point since
October 2003 - made a potential purchase more inviting for Microsoft. Earlier
this week, Yahoo posted a sharp drop in fourth-quarter profit and said it would
trim its workforce.

What’s more, the online-advertising market is expected to grow at a fast pace in
the next few years, Microsoft said in its release on the bid. “Today this market
is increasingly dominated by one player. Together, Microsoft and Yahoo! can offer
a competitive choice.”

Stocks Ready for a Higher Opening; Microsoft Bids for Yahoo; New Hope for Bond Insurers

NEW YORK (AP) — Stocks headed for a rally Friday, with sentiment bolstered by a Microsoft Corp. bid for Internet company Yahoo Inc. and new hopes for a bond insurance rescue.
Microsoft is offering $31 a share per share for Yahoo, or a total of $44.6 billion, representing a 62 percent premium to Yahoo’s closing stock price Thursday. Merger news, which has been in short supply for months, tends to energize the stock market.

Hopes that the struggling bond insurance industry will get some relief were stoked after CNBC reported that Citigroup Inc., Wachovia Corp. and six other top banks have banded together to work with New York State Insurance Superintendant Eric Dinallo to bail out struggling bond insurers.

The report should be encouraging to investors who had feared that such major insurers as Ambac Financial Group Inc. and MBIA Inc. would not be able to attract enough capital to avoid downgrades from ratings agencies.

The futures contract for the Dow Jones industrial average rose 119 points, or 1.03 percent, to 12,733. Futures for the Standard & Poor’s gained 12.40 point, or 0.87 percent, to 1,392 as Nasdaq 100 futures gained 19.2 points, or 1.08 percent, to 1,867.

Investors are also waiting for the Labor Department’s January employment report to give them clues about the state of the economy. They should be relieved if jobs generation and the employment rate show strength.

A number of economists have voiced concern that the U.S. already has entered a recession. But a strong employment report would suggest that enough workers are employed to keep consumer spending at healthy levels and keep the economy churning.

Economists surveyed by Thomson/IFR are forecasting that 70,000 jobs were created in January. That would be a sharp improvement over just 18,000 jobs in December. Yet before the mortgage crisis that began last summer, jobs growth of 100,000 was considered the norm. The report is due at 8:30 a.m. Eastern time before the opening of trade.

The expected gains in the stock market put pressure on Treasurys as the two markets often trade in opposite directions. The benchmark 10-year note’s yield was 3.64 percent, up 3.59 percent late Thursday.

On Thursday, Wall Street ended its worst January since 1990 with a huge advance, after investors set aside worries about bond insurers and grew more optimistic that the Federal Reserve’s interest rate cuts will indeed help lift the economy.

In addition to the jobs report, investors also are eager to see the Institute for Supply Management’s January manufacturing survey at 10 a.m. Eastern. The December survey raised alarms because it was the first one to indicate a shrinking manufacturing sector since January 2007.

The survey’s headline index is expected to read 48.3, according to Thomson/IFR. That would mark an improvement over 47.7 in December, but all readings under 50 indicate contraction.

Other technology stocks also should be in view. Google Inc. failed to meet analysts’ expectations for its earnings and Motorola Inc. said it is mulling a sale of its handset division.

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