Yesterday I posted that Microsoft Corp. (NASDAQ: MSFT) might buy Yahoo Inc. (NASDAQ: YHOO). Despite the impact on Microsoft's margins, the high price, and the evaporation of deal talk last April, I think Microsoft cannot afford to fall further behind Google, Inc. (NASDAQ: GOOG), so a merger with Yahoo remains quite likely.
Here are three reasons:
- Combined, Microsoft and Yahoo will be a considerable competitor to Google. According to comScore, combining the two would yield a competitor with 37.1% share -- 10.3% for Microsoft and 26.8% for Yahoo -- which still lags Google at 49.7% -- but is far more formidable than either alone.
- Combined, Microsoft and Yahoo will lead in Web site visits. With 1 billion unique visitors per month --Microsoft (527 million) and Yahoo (476 million) -- would in combination surpass Google (528 million), according to comScore.
- Microsoft can afford a deal. If Microsoft paid a 20% premium for Yahoo -- $44.4 billion -- Microsoft could use 15.3% of its shares outstanding -- 1.46 billion shares at $30.46 per share -- to fund the purchase.
But there is one big negative. Adding Yahoo would dilute Microsoft's profit margins, the highest among software companies, according to Bloomberg data. Yahoo had margins of 12% for 2006, and Microsoft's were 28% for its fiscal 2006, which ended June 30.
Do you agree? Do you think someone else should buy Yahoo? Or should Yahoo stand alone?
Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.
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Reader Comments (Page 1 of 1)
6-19-2007 @ 6:47PM
Zac said...
I bought today..... I think regardless the stock can't go much lower unless Yang's a complete idiot and wants to ruin most of his fortune (assuming he didn't dump his shares already.....)
I (personally) don't like Microsoft much, just my own personal tastes.... yet I think ANY buy, by a competent, formidable management team, people who KNOW what to do, and KNOW how to stimulate things, they need more revitalization.
I remember the first Yahoo TV Ad's and they were great... Yahooooooo, they WANTED you to use their site, and now with the behemoth Google, with a ****load of cash to blow just to blow them out of their water, they need someone (hopefully Yang) who will wake this sleeping Giant up, and put a good fight into it and see if they can turn things around….. or find someone who does….
-Zac
6-19-2007 @ 9:23PM
Als Capital said...
A Microsoft buyout of Yahoo would be exactly the outcome that Google wants. Beyond the direct purchase costs, it would take years of costly and complex integration, and divert focus from where the proper Microsoft strategy actually lies. Despite some recent moves from Yahoo, the company largely missed the boat, and Yang is no Brin. For a partial summary see:
http://mnrtrading.blogspot.com/2007/05/moats-and-sappers-microsoft-and-google.html
6-20-2007 @ 3:11AM
Kamal said...
Except on search ..buying yahoo does not help microsoft.