"Today the market is increasingly dominated by one player," said Kevin Johnson, president-platforms and services at the Redmond, Wash.-based Microsoft. "By combining assets, we can offer a better choice [for consumers, advertisers and publishers]."
That one player, of course, is Google, which owns about two-thirds of the market share for internet search and has outmaneuvered Microsoft and Yahoo for the past couple years.
Touting merger's benefits
On a conference call early this morning, Mr. Johnson touted the research-and-development power of combining Microsoft and Yahoo; the economies of scale that exist within search and their respective ad-serving technologies; the importance of infrastructure, such as servers; and the operating efficiencies of a merger.
"We're very excited about today's announcement," Microsoft CEO Steve Ballmer said on the same call. He called the move for Yahoo the "next major milestone in Microsoft's company-wide transformation to embrace online services overall and invest in search and advertising," and said he also wanted Yahoo management and employees to be excited about the deal.
He said he called Yahoo CEO Jerry Yang last night to discuss the proposal, something Microsoft has been thinking about for the last 18 months.
"A year ago the Yahoo management team told us it wasn't the right time ... we believed then in the benefits of combining those two companies and we believe now more than ever," he said.
Integrating 12,000 employees
Exactly how Microsoft would integrate Yahoo's 12,000 or so employees is unclear but Microsoft said it has a plan to include leaders of both companies in an integration roadmap. They briefly addressed the power of the brands involved and hinted that Windows and Office Live and Yahoo would remain. He didn't clarify what would become of MSN.
"There will be a Windows Live, there will be an Office Live. And Yahoo -- those are all powerful opportunities, powerful brands," Mr. Ballmer said. "Exactly how we relate MSN and those other things, we have some thoughts but a team from both companies would be in the best position to assess that."
Yahoo released a statement this morning acknowledging it received the bid and that 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."
Earlier this week, Yahoo reported its fourth-quarter earnings and gave investors a disappointing forecast for 2008. Recently Yahoo shares dropped below $20 for the first time in several years; however, in early-morning trading the Microsoft bid pushed shares up about 50%.
"Sure we could have hired engineers, we're very good that," Mr. Ballmer said. "But the market continues to grow and the leader continues to consolidate. There's nothing like putting together ... two larger sophisticated R&D organizations." Areas of research-and-development include search relevance, search verticals and the social-media aspect of search.
Feedback from publishers
Microsoft said already this morning it had gotten unsolicited feedback from publishers and advertisers that the move is the right step and will create a compelling marketplace.
Imran Kahn, an analyst at J.P. Morgan, released a note this morning predicting Yahoo's board would approve the Microsoft deal.
"We think as search market becomes competitive, Yahoo is better off inside a larger company with strong balance sheet and technology expertise for further fuel its growth," he wrote.
Microsoft said the deal is a mix of 50% cash and 50% equity and the company hopes to close it in the second half of calendar year 2008. Executives predicted it would be break even or better for Microsoft in the second full fiscal year after closing.