Microsoft’s Yahoo Bid Rejected: Watch This Space!

Economics, The Interwebs Add comments

Last week news broke that Microsoft had made a bid to buy rival search marketing company Yahoo for a figure of $44.6bn in a deal that would be made up of both cash and shares. When made, the offer was 62% above Yahoo’s closing market share price on Thursday.

The offer was made to Yahoo in the form of a letter to the board days after revenue forecasts had been cut and the company had committed $300m to try and revive its core business in 2008.

The offer to buy Yahoo came at a time when there is increasing belief that Microsoft’s existing business model is becoming more unfeasible in the internet age. The take over offer could therefore indicate a radical shift in how Microsoft perceives the internet and its own future within it.

With Google releasing a range of free online software alternatives for much of Microsoft’s offerings over the last year, the search market leader is certainly challenging the enterprise business model that software giant Microsoft in built upon.

Currently Microsoft makes the majority of its money by selling license fees to its impressive software packages installed on PCs and servers. With Google’s services available freely over the internet this immediately threatens the foundations the business is built upon.

Although there was much talk of counter bids and legal challenges from Google should the deal be accepted, many will rest easier in the Google camp with news that Yahoo has rejected at least the initial offer for its holdings.

With this take over bid Microsoft is undoubtedly after what it sees as the gems in Yahoo’s online advertising empire, a sector that Microsoft has thus far struggled to move into with any great success. Yahoo also has a range of online applications that could bolster Microsoft’s existing Windows Live online services for both businesses and consumers. It seems now Microsoft will have to come up with a better offer to in order to acquire those assets, meaning a steady re-evaluation of how valuable those assets are, and how important they actually are in Microsoft’s changing business model.

Yahoo said of the original offer that it “substantially undervalues” the company and was not in shareholders’ interests.

Originally worth $31 a share, the Wall Street Journal was quoted as saying that Yahoo’s board would be unwilling to accept any offer shy of $40 a share. That price is a 109% premium on the share price on the day of the original offer, and a price Yahoo has not traded at for over two years.

Although the original has now been rejected – worth $41.8b at time of rejection– the table was left open for further negotiations so watch this space as Microsoft could well sweeten its offer.
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