Software giant Microsoft (NYSE: MSFT) announced it has made an unsolicited offer to acquire internet company Yahoo (NASDAQ: YHOO) for nearly $31 a share. This represents a 62% premium to the closing share price of Yahoo on Thursday, January 31, 2008. The purchase price would be $44-$46 billion dollars, and would involve no financing.
Yahoo stock soared in pre-market trading immediately when the takeover bid was announced this morning, from its previous close of $19.05 to more than $29 a share. The action, fueled by buyers who were trying to pick up a quick profit on the premium which was being priced into the stock, and arbitrageurs who jumped in to try to capture the spread between the share price and the premium price Microsoft has offered, bid the price up rapidly but then saw the stock price retreat slightly by mid-morning with some profit-taking already. Microsoft stock was down 1.98 to 30.62 by noon, a drop of 6%.
Microsoft has reportedly been in informal talks with Yahoo for more than a year, and the takeover bid comes on the heels of Yahoo’s poor earnings performance and outlook released this week, as well as its slumping stock price which nearly hit a four-year low.
Investors reacted strongly this week to both Yahoo’s poor earnings report and its dim prospects for immediately lifting itself out of its business malaise. The slumping internet company reported it earned 15 cents a share ($205.7 million) for its fourth quarter in 2007, down from 19 cents a share ($268.7 million) during the same quarter in 2006. Investors had greeted this news by slamming the stock down to below $19.
With search engine giant Google (NASDAQ: GOOG) controlling 58% of internet search activity, Yahoo has just under a 23% share, while Microsoft comes in at a distant third with 9%. This takeover attempt is Microsoft’s attempt to enter more deeply into the search engine business, and to challenge Google, the number one search engine. What’s at stake is continued growth in this lucrative segment of the internet business, where Google has pioneered the effective way of monetizing internet advertising. The lucrative online advertising business was expected to double from $40 billion to $80 billion in the next two years, Microsoft said.
Due to the size of the bid, it is expected to prevent other suitors such as News Corp. (NYSE: NWS.A), Time Warner (NYSE: TWX) or AT & T (NYSE: T), which has partnerships with Yahoo, from trying to match the offer. Microsoft may have to increase the cash in the bid, perhaps to $35 a share up from the initial offer of $31.
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