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Yahoo & Microsoft?

If you didn't believe that it was a new era at Microsoft before today, Steve Ballmer's proposed $44.6 billion acquisition of Yahoo! will probably change your mind.  Never before in the history of the company have they tried to acquire and digest something so large.  With the goal of taking on Google, Microsoft has publicly offered a 62% premium to Yahoo! shareholders. If they're successful in their bid, Microsoft will acquire one of the oldest Internet names and a grab bag of other properties, including some undeniably great brands like Flickr.

I've just listened in on the call with Kevin Johnson, Ray Ozzie and Steve Ballmer.   

Ballmer began with some basic positioning. This is the next major milestone in Microsoft's company transformation to embrace the online services platform and search and advertising.  Discussion have been underway for the last last 18 months.  Ballmer called Yang last night, and let him know what they were planning to do.

Johnson then walked through key reasons for the acquisition.  He began by positioning this deal in the context of the direction laid out at last summer's financial analysts meeting, pointing out the successes that Microsoft had experienced executing on that direction so far.  He said that there are really two key dynamics in the online advertising business: scale economics in search and ad serving, and scale economics in capital expenditure.  He noted that the industry would be better served with more competition, and that is increasingly dominated by large players.  

Synergies Johnson sees are in (1) the ability to combine engineering talent and drive more innovation across a wider range of opportunities, (2) the ability to focus engineering resources on emerging opportunities like video, (3) scale economics through elimination of duplicate capex, which will lead to improved revenue yields and (4) reduction of redundant operating expenses through eliminating duplicate head count.  Microsoft says that they have a clear integration plan that will incorporate leadership from both companies, and "great respect" for what Yahoo! has accomplished.

Ray Ozzie gave a very brief overview of the technology directions that Microsoft sees as important.  One item which caught my attention was his emphasis on social environments.  Not a lot of details, though.  Unsurprising, as it would be unusual to talk about the combined product plans before actually merging the companies. 

CFO Chris Liddell gave an overview of the deal.  It's valued at $44.6 billion 50% in cash and 50% in equity, with .9509 Microsoft shares per Yahoo! share based on yesterday's closing price. They expect to break even in the second full fiscal year.  

After that, there was Q&A.  A lot of questions revolved around "why now?" with analysts taking various approaches to the same line of questioning.  The responses were perhaps more illuminating than the formal part of the press conference.  Microsoft appears to believe that if they don't take this action at this time, then something will be lost.  Otherwise, why not conclude a negotiation with Yahoo? 

Fred Wilson: "This deal will happen unless another strategic wants it (News Corp?). Because at that price, no financial buyer can make the deal work, particularly in this financing environment."  So who else might want it?  AOL is in disarray too.  Google couldn't do it without attracting anti-trust attention.  News?  

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