News

Microsoft Allegedly Drawing Up Yahoo Purchase Plans

• By Kurt Mackie
• 10/21/2011

Yahoo may be under acquisition consideration again by Microsoft, despite a recent joke by CEO Steve Ballmer.

Ballmer grabbed the limelight on Wednesday at a Web 2.0 Summit talk, saying that Microsoft got "lucky" when it failed to acquire Yahoo in 2008. The quip was part of a free-flowing discussion in which Ballmer talked about Bing, competition with Google Apps and Android, and other matters.

Ballmer was asked at the Summit if he were glad that Microsoft didn't buy Yahoo.

"You know, times change," Ballmer said. "You ask any CEO who might have bought something before the market crashed in 2008, 'Would you be glad that you didn't buy something'? Hallelujah! Everything else aside, the market really kind of fell apart. If you think about the timing, if Yahoo had accepted our bid…we would have closed post Lehman Brothers. So, yeah, sometimes you're lucky."

Yahoo hasn't been so lucky since the original $44.6 billion acquisition offer went down during negotiations. The bid was communicated via a Jan. 31, 2007 letter to then-CEO and Chief Yahoo Jerry Yang, who initially said that the offer undervalued Yahoo. The bid elicited a public fight at Yahoo's board. It affected Yahoo's stock valuations, leading to a four-point dip when the bid was finally withdrawn by Microsoft in May 2008.

It's been a bumpy ride on the stock market ever since for Yahoo. Today, however, The Wall Street Journal is reporting that Microsoft is working with Silver Lake Partners and the Canada Pension Plan Investment Board to assemble a financial proposal to purchase Yahoo.

Citing "people familiar with the discussion," the WSJ article stated that Microsoft is considering putting up "several billion dollars of funding" for the deal. The proposal is still under discussion and could be pulled if the financing plan doesn't work. Microsoft's main interest is to protect its search-advertising deal with Yahoo, the unnamed source told the WSJ.

Microsoft may have failed to buy Yahoo once before, but it gradually recruited some of Yahoo's key engineering talent after the talks collapsed. In late 2008, Microsoft hired Yahoo search leader Dr. Qi Lu, who now serves as president of the Microsoft Online Services Division in charge of search. He and Microsoft team members, including former Yahoo engineers, eventually launched the Bing search engine in June 2009.

One month after the Bing launch, Microsoft and Yahoo announced a deal on search advertising in which Yahoo's sites would have search boxes powered by Bing, while Yahoo would take over some advertising sales functions. That deal was supposed to have brought in $275 million yearly in cash to Yahoo. However, outgoing Yahoo CEO Carol Bartz, who signed the partnership deal with Ballmer, said that Microsoft's AdCenter ad platform had some technical limitations that resulted in Yahoo not realizing its revenue expectations.

AdCenter's shortcomings were highlighted by Peter Klein, Microsoft's chief finance officer, in Microsoft's fiscal first-quarter earnings report.

Despite that setback, Microsoft and Yahoo have renewed the revenue-per-search guarantee portion of the deal for the U.S. and Canadian markets through March 2013. That point was stressed by Yahoo on Tuesday in its fiscal third-quarter financials. Yahoo indicated that it had a 5% year-over-year revenue decrease largely attributed to the Microsoft search deal.

Under the search deal, Yahoo gets reimbursed by Microsoft on a quarterly basis. Microsoft paid Yahoo $53 million in the third quarter to reimburse Yahoo for search operating costs, plus another $4 million, according to Yahoo's financials. However, those reimbursements haven't been enough to cover Yahoo's expenses.

"Yahoo's cumulative transition costs exceeded the $150 million reimbursement cap specified in the Search Agreement," the company explained in its third-quarter fiscal report.

Ballmer said during the Web 2.0 Summit talk that Bing use has increased from a seven percent U.S. market share to almost a 15 percent market share. When the Yahoo portals are added, the U.S. market share is between about 25 and 30 percent, he contended. He also claimed that 70 percent of search users do not care which search provider delivers their query results.

On top of the search talk, Ballmer took a shot at Google. He said that Microsoft has been beating out Google with apps in the cloud "98 percent of the time." That comment drew a response from Google Cofounder Sergey Brin. In a separate talk at the Web 2.0 Summit, Brin said that he was "surprised to hear something that aggressive from Microsoft."

It's not clear which cloud-based apps Ballmer was referring to, as Google Apps mostly compete with Microsoft Office, or more directly, Office Web Apps. A first-quarter 2011 study by Forrester Research reported survey results from 150 IT decision makers, who were asked about the number of productivity suites supported by IT, which may not correlate with actual organizational deployment. Microsoft Office was widely supported across versions. Office 2003 or earlier versions was supported by 74 percent, with 72 percent and 52 percent supporting Office 2007 and Office 2010, respectively. Google Docs, however, only had 8 percent support, according to the survey. The survey results were published in "Market Update: Office Productivity Alternatives" by Forrester Research.

Ballmer was also dismissive about Google Android, even though that mobile OS is the front runner with 43.4 percent of smartphone market vs. 1.6 percent for Windows Phone 7.

"You don't have to be a computer scientist to use a Windows Phone," Ballmer said in reference to Android smartphones, suggesting they are difficult to use. "[They are] pretty inconsistent, don't look alike," he added.