Now Hear This!

As if you needed further proof that the guys at Google have challenged Microsoft’s machismo, take a look at the $44.6 billion offer Microsoft has made for Yahoo!. The offer at $31 a share is a whopping 62% premium on Thursday’s closing price for the web empire.

Microsoft is, indeed, pulling out the big guns as it attempts to take control of the increasingly important online arena. While it is an unsolicited offer to Yahoo!, it’s one Yahoo! should consider for its own survival. It’s no secret that Google rules the web, especially when it comes to search. In fact, a lot of the strategies we’ve employ here at EDN.com have to so with search engine optimization (or SEO, for those in the know) and are specifically focused on Google. As such, Yahoo! has lost its online footing to Google, which has been making strategic acquisitions left and right to strength its hold on the web, even overpaying when necessary (like $1.65 billion for YouTube).

Microsoft and Yahoo! fall second and third to Google in terms of web search and online advertising sales. Microsoft CEO Steve Ballmer in a letter to Yahoo! proposed that such an acquisition would allow synergies to take on the “one player” (ie Google) that dominates through: scale economics of the advertising platform; expanded R&D capacity focused on priorities such as a single search index and single advertising platform; the usual operational efficiencies; and what Ballmer called “emerging user experiences,” explained as the merged company’s combined ability to focus engineering resources on emerging scenarios such as video, mobile services, online commerce, social media, and social platforms, all areas where the two companies fall years of development behind Google.

“Microsoft's consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers,” he wrote in a letter to Yahoo! yesterday.

“While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers,” Ballmer continued.

This isn’t the first time Ballmer and crew have approached Yahoo!. In late 2006 and early 2007, Microsoft talked with Yahoo!’s board about combining efforts to create a more effective competitor in the online marketplace. At that time, a number of ideas were put on the table, including commercial partnerships and a merger, which Yahoo! rejected.

“While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing,” Ballmer said in his letter, adding that Yahoo! has not successfully executed strategies that would have made it a more formidable competitor.

“A year has gone by, and the competitive situation has not improved,” Ballmer concluded.

On its behalf, Yahoo! today issued a short statement, saying it would “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.”

Shareholders, meanwhile, should be very happy this morning. Merger news among household names, as it always does, invigorates the market. And as such, trading across the board is up and Yahoo!’s stock was up nearly 45% in trading as of noon eastern today.

Can a combine Microsoft-Yahoo! compete with Google? Is Microsoft just throwing its weight around? Can Yahoo! pull it together on its own and get back in the game? Share your thoughts on the proposed acquisition below. And for more on this possible deal, see EDN Executive Editor Ron Wilson's take in his Practical Chip Design blog, "Microsoft, Yahoo!, and the SoC business model."

--Suzanne Deffree, Managing Editor, News