Introduction
This paper deals with the plans of Microsoft to acquire Yahoo in a merger and partial alternate plans. It then goes on to discuss the Yahoo-Google deal and its repercussions. Microsoft as we know is the world’s biggest manufacturer of Operating Systems and Google is a company which has radically revolutionized the concept of internet searching. When both the companies are after one particular company it sure provides a good topic.
Microsoft’s Proposal:
On February 1, 2008, the computing giant Microsoft Corp. has announced a proposal to overtake and acquire the outstanding shares of Yahoo! Inc. The bid was made for an approximate amount of about 44.6 billion dollars, in other words a $31/share offer. This offer represented a 62 percent premium over the closing price of Yahoo’s stock on Jan 31, 2008 which was $19.18/share.
In the proposal made to Yahoo and directed to the Chairman of Yahoo, Roy Bostock and the CEO Jerry Yang, Microsoft has put out an offer to acquire all outstanding shares payable in the form of cash or 0.9509 of a share of Microsoft Common Stock. The proposal made it clear that the shareholders would be provided with the choice to take up cash or opt for the other form of payment. This option was subject to pro-ration so that on an average half the shares will be converted into Microsoft shares while the other half will be converted into cash. While making this proposal, Microsoft quoted that the primary reason for its proposal was to create a competition in the field of online search and advertising and thereby providing its consumers a choice among better products. There was also a fleeting mention of the fact that the current search industry was like a monopoly (Google).
The other reasons which Microsoft quoted were to improve the Scale economics in advertising platform, a chance for a R&D expansion, and the need to eliminate redundant infrastructure and duplicative operating costs. Microsoft hoped that the proposal when accepted will result in the outcome of a company which can help its shareholders enormously.
Yahoo! Uptight!
Yahoo always believed in its potential to make it big in the internet market. The market share of Yahoo was about 23.7% when it came to the search market. Microsoft had a market share of 9.8% of the search market, with Google in the lead with about 58.4% market share. Yahoo has been maintaining this market share in the search department for quite a while and saw no reason why there would be any loss in the near future.
On the other hand Microsoft’s offer was counting on the slump in the share value of Yahoo over a period of time. In fact, Microsoft’s offer to acquire Yahoo is not a new love. Microsoft has been a persistent suitor of the Microsoft-Yahoo marriage for quite a while. The offers have been made earlier in 2007 when there was a slump in the shares of Yahoo . But Yahoo, seeing a bright future ahead did not entertain all those advances.
When the previous chairman of Yahoo, Terry Semel stepped down, following an unprecedented slump in Yahoo’ shares, Microsoft decided to seize the opportunity and pushed hard for the alliance to be finalized. The CEO of Yahoo, Jerry Yang though, was not all that enthusiastic about the offer, which put a premium of about 62% on each market share. He decided to push it to the limit and demanded that the price be set at $37/share. Microsoft felt that this price was too high and decided to not hike the offered price and on receiving news that the offer has been refuted, decided to go to the extent of a hostile takeover of Yahoo and was pretty confident in its stand regarding the issue.
Noteworthy:
A merger of this sort would have helped Microsoft in reducing its market losses in the online services from about $949 million to a net loss of about $289 million. Regardless, Microsoft’s reach to the customer base would have increased phenomenally and with its new-in-line advertising products and prospects, Microsoft decided for the merger anyway.
Another very interesting point is that, Microsoft was ruled by a federal district court in Washington in 2001, to have repeatedly been violating the law by stifling any competition posed by the browser, Netscape to IE. Microsoft is still being monitored by those antitrust laws. With this background, it only seemed extremely ironic that Microsoft was happy that Google was the only company which could not acquire Yahoo in the market because it would create a market monopoly and such an action would be against the Antitrust Regulations.
Personally, I feel that Yahoo should have taken up the offer. This would have yielded its shareholders very good profits. Again, the merger even in the case it happened would have started profiting the parties after quite a time. Meanwhile, Yahoo would not have lost anything except its independence (which might be good or bad, depending on how you see it)
Google the spoiler
When Microsoft started aggressively pursuing its offer, Google decided to buckle up and go against it. So the CEO of Google called up his compatriot at Yahoo and voiced his support to help protect Yahoo from Microsoft. At the same time, the Google lawyers started preparing a case against the deal for the lawmakers in order to prevent a deal (even if it happens) from materializing.
Amid all these issues, the deal which Microsoft assumed would have been smooth and soft turned out a very sticky affair. Microsoft sensed that the deal was not going anywhere (which, of course was right….). So, Microsoft walked away from the deal.
And Microsoft was right in doing so. After all, if Microsoft could have invested $44 billion in a slow, losing internet Search Company, it could have well bought the remaining market share with all the money it was putting in. The merger would have been a distraction to say the least.
The Aftereffects
Yahoo having refuted the deal with Microsoft was not to take the break-up a success. In other words many of the shareholders started to view the decision of Yahoo as more like “trigger-happy” than anything to do with business.
Let me get you clear on this. The market value of Yahoo-shares was about $19.95/share the day before the Microsoft proposal came in. The day the proposal was made official, the market share of Yahoo reached close to $26/share. But Yahoo insisted that the offer reach up to $37/share, which was pretty unreasonable even looking at the share value of $30/ share. So when, Microsoft moved away from the deal, the share value slumped down by 10% in the NASDAQ market and finalized at about $23.52/share. This drew the wrath of the shareholders, who along with some of the board representatives were in support of the Microsoft deal. There was an ever rising discomfort and distant grumbling with everybody hinting that it may be the time for a new CEO.
This pressure played a key part in deciding the next step taken by Yahoo.
An Interesting Development
Microsoft has made it clear to Yahoo that it was not into buying Yahoo outright anymore, but proposed an alternate proposal which would buy only the search and advertising part of Yahoo. This alternate proposal, though it priced the value of Yahoo’s shares at more than $33/share was not convincing enough for Yahoo, because it did not believe that dividing the company into parts would favor the company’s growth in any way. With the pressure to chalk out an alternate path for the company mounting, and the bid for a hostile take-over by Microsoft looming around the corner, Yahoo! Inc. did something it has always been against since the company’s inception.
Yahoo! Inc. decided to launch an online advertising test with Google. This was supposed to be for two weeks with the Yahoo! Website displaying the Google ads alongside its ads on its web pages. Finally, on 6.13.08 Yahoo made an announcement after the conclusion of talks between Yahoo and Microsoft finally. Google and Yahoo have decided to work together on a “non-exclusive” agreement which allows Yahoo access to Google's AdSense for search and content advertising programs in the U.S. and Canada. The deal was for 10 years with an initial 4 year program followed by two 3 year renewable programs. Jerry Yang expects this deal to generate revenues of around 800 million annually.
Google was fairly confident that the antitrust regulations would not affect the deal because the deal was not that of a merger, but merely a way for Yahoo to use Google’s ad-sense programs to gain access to Yahoo’s advertising programs. Google and Yahoo have also decided to integrate their Instant Messaging clients.
Noteworthy
Google and Yahoo devised the deal so that a break-fee of about 250 million dollars will be triggered in case any company decides to acquire the company (pointing to a hostile takeover by Microsoft) in the first two years of the merger.
Yahoo and Google decided to go ahead with a three and a half month wait so that the Department of Justice (DOJ) can evaluate the deal and see if it meets the antitrust regulations.
Antitrust
The deal between Yahoo and Google is perhaps the most defining step in the world of internet till date. The deal should be watched closely as to the effects it has on the way people receive information and see the world. This is essential because we should not regress into the times where the information we receive and hear is defined by a few select individuals or conglomerates. The Yahoo-Google deal with about 90% market share has the ability and the incentive to do just that, if not more.
Search engines being the most prominent ways to internet surfing, a deal of such sorts could extremely limit the choice of the users or could trick users into seeing and using the internet the way the companies want to. In effect, such a deal could amount to, and end up making the field of search advertising a monopoly.
With the two major advertising giants hand-in-hand there is little scope for competition and there is an imminent danger that such a situation might yield an unhealthy market with high costs for advertising and limited choice. The way search advertising works and the way search queries work are completely different with a seamless integration between the two. The normal search queries are unpaid and are present in the page. The advertised results, when clicked, require the advertiser to pay the stipulated amount to the service provide (Google or Yahoo, as far as the deal is concerned). Google’s way to advertise is not transparent and has a potential to influence the auctioning of the ad-spaces thereby influencing the whole market.
The deal hints at a provision which might end up setting the price floor. This is because the provisions of the deal point out that Yahoo will rely on an ad which will fetch a higher price, in other words monetization. Google can sell search ads on Yahoo whereas Yahoo cannot sell search ads on Google. And with “price floor” concept mentioned this could be a menacing prospect with Yahoo only advertising higher revenue generating ads thereby monopolizing the search advertising. Also with this, the search advertising platform “Panama” of Yahoo might phase out in competition to Google’s own platform.
The deal is such that if Google earns more, Yahoo does too. If it loses some, Yahoo loses too. So, from any angle, Google is not losing out on anything. The situation is always a win-win for Google.
Unbiased View of the situation
Google started out as an independent company with a reputation to promote openness at a time when Microsoft was a major conglomerate which had the ability to reduce or eliminate competition. Google started out as a search project and expanded its horizons to search advertising, and pervaded the web with features like IGoogle, blogspot, free email and many other social web features. This was a field relatively unexplored by Microsoft. The entry of Google into the search market and its introduction of Google search was like a fresh breeze wafting into a suffocating room.
Microsoft’s antitrust practices were exposed and the company is being monitored so that it does not indulge in any such things anymore. Though the openness of Google is very important, with the growth of the organization and with Google not making any promises to protecting the safety of user, all the users of the services are at a potential risk of being exposed because of this openness. And with Google dominating the scenes now more so than ever, there is a tiny tinge of doubt…”What will happen if this huge giant suddenly loses it?”
Microsoft on the other hand is fast becoming a corporation which can reach out to people because of its venture into the market with products like Xbox, Zune. Another reason why Microsoft is not as scary is because there is a competitor now, Google. Microsoft is out of spotlight and speculation now and it seems that Google has taken its place. And with Bill Gates stepping down in the near future, the image of Microsoft is never going to be the same. It can cast away its image as a possessive goliath.
You can say all this but in reality, there really is no way to trust Microsoft with privacy. The company has time and again proven that the only thing which interests them is their own interests. But the time of speculation is here. Will Google walk the same path as Microsoft? Or is it already down the road? Another one very important question is whether it’s Microsoft steering the opinion of the people against Google. Or is this all just speculation?
This merger between Yahoo and Google has a potential to ruin and completely manipulate the market as we know now. It puts Google in the position of an internet behemoth with a very high incentive to go berserk. The situation is downright scary. If you are not scared yet, you have every reason to be. If this deal goes through, all we can do is believe in Google and hope it does not put its interests over those of its users.
