FAQ: What does Microsoft's Yahoo purchase mean?

Microsoft and Yahoo have some serious technology overlap but online advertising and challenging Google are the goals

Microsoft Friday rocked the industry with its offer to buy Yahoo. Clearly, the battle lines against Google are poised to be redrawn, and other areas of the Web that Microsoft is fighting for, including services it can combine with its on-premise software, could get a makeover as well. In addition, the results could also boost the creation of new tools aimed at corporate users. Here's a look at what is going on.

What happened?

Microsoft made a bid to purchase Yahoo for US$44.6 billion. The deal, however, is far from done, but the ball is clearly in play and on Yahoo's side of the court. "The hard question asked of [Yahoo] management will be how Yahoo intends to match the return represented by the Microsoft bid, and produce a 62 per cent increase in Yahoo's stock price," said Allan Krans, an analyst with Technology Business Research. Microsoft said it hopes to close the acquisition in the second half of this year. The deal would become Microsoft's largest acquisition ever, dwarfing the $6 billion it paid last year for Aquantive.

What's this all about?

Microsoft has three simple answers. Search. Advertising. Infrastructure to support delivery of those and online services. Both Microsoft and Yahoo are playing from behind in the search game against Google, whose US Internet search market share increased from 51.7 per cent in the fourth quarter of 2006 to 58.4 per cent during the same quarter in 2007, according to comScore. In that same period, Yahoo declined from 27.6 per cent to 22.9 per cent, and Microsoft's from 10.4 per cent to 9.8 per cent. And with that many eyeballs, Google also can parade out its other services, such as productivity applications, that peck away at Microsoft in other areas.

Haven't we been here before?

Yes, Microsoft CEO Steve Ballmer said Friday that the two companies have been talking for the past 18 months. Yahoo said last year that the timing was not right and it could say the same thing this time although that seems unlikely after CEO Jerry Yang said this week it might be 2009 before Yahoo sees a turnaround from its falling profits. Ballmer personally called Yang Thursday night to discuss the offer.

Why does this make sense now and why buy a company with failing fortunes?

Both Yahoo and Google [missed analyst estimates by 3 cents] have shown weakness this week through their earning statements. Yahoo's stock is down to November 2003 levels and it says it will lay off 1,000 people in February so there might not be a better time for Microsoft to strike and get shareholders and others with Yahoo financial interests to put pressure on Yahoo's board of directors to agree to Microsoft's overture.

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