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The Offer

Microsoft is offering $41 - $44 billion to acquire internet pioneer Yahoo to get a strong hold in internet search marketing. Yahoo currently hold's second position in search marketing behind Google and ahead of Microsoft which currently hold fourth place.

Yahoo Inc.

• Yahoo is the one of the biggest & trusted brand name in world of internet. 

• It is the most visited website in world with nearly 500 million users.

• Sites like Yahoo! Finance, Sports, and News are category leaders and simultaneously hold the number one spot in terms of both audience size and engagement.

• Yahoo! Mail, the e-mail services of yahoo is a worldwide leader for 10 years.

Despite all this yahoo is lagging behind in financial growth the prime reason behind this slow growth is 

• Lack of focus on its most lucrative and popular categories like finance, news, sports, mail and most importantly search.

Strategic shift

Lack of focus is a thing of past currently company is paying full attention to its most popular categories and is concentrating on enhancing user experience and there by increasing user engagement on its website and instead of adding new categories company is increasing its offering under same categories.

Most visible example is its video offering instead of offering videos as a totally different category company has added category related videos on its each category page, one can find out videos related to various financial news/events on yahoo finance page, this simple thing not only enhanced the engagement of user with site but also helps to promote videos related category.

Company has also acquire a more open approach for content offering unlike earlier mostly self-contained approach company is now offering contents from other sites even from competitors on its website and thereby offering visitors most of and best of web from its websites.

Company's renewed focus on its popular categories is also visible in its recent buyout, all buyout that company had made in last one year are related to its most popular categories (finance, news, sports, mail and search).

Too late ?

Many people consider yahoo has already lost the search marketing battle and will never be able to compete with Google and to some extent it seems to be true, but one must consider the fact that biggest assets of any website is its users and yahoo still is number one in this aspect of business it was just lack of focus which drag fortune of company to uncertainty. Now with the right focus and clear-cut strategy of growing existing strongholds, company is all set to evolve not only as biggest online content provider but also as a strong competitor for search leader Google.

Microsoft and Yahoo together

Now biggest question is why Microsoft is paying seemingly such a Hugh amount for Yahoo (much above its market cap at the time of offer). Firstly the market value of a company not always represents its fundamental value or real business value. Second and most important thing is the future potential of search marketing which is expected to rise 45 billion currently to about 75 billion by 2010. Now despite all attempts Microsoft is still way behind the Google and Yahoo, by acquiring Yahoo, Microsoft will not only get the bigger market share in search marketing but also get access to millions and millions of users which are so far near captive to yahoo for years. More over Microsoft is also expected to save Hugh amount by creating synergies between Yahoo and its own search marketing business and also in product development activities. Moreover Yahoo messenger and MSN messenger will be able to offer lot more to its user communities.

Yahoo Valuations

At $44 billion yahoo is not expensive at most it's just reasonable and if got through it will be Microsoft's one of the best buyout in it's history.

Reasons why its Yahoo should be valued above $44 billion.

• Recent strategic shift is expected to put company back on growth path.

• Even now when company's renewed focus is yet to show results, company is earning nearly $660 million in yearly profits (FY 2007) which gives it a PE ratio of  nearly 66 which is not that high for a pioneer company with strongest base and Hugh future potential.

• Company hold's nearly 40% equity in Alibaba an china based E-commerce site. which although is not core business of company but holds a lot of promise for future and if sold at current market price will give company a whopping $5 billion.

• Currently Company 36% equity interest in Yahoo Japan  is valued at $7 billion.

• If one adjust the valuations of equity interests and net cash that company holds (cash and cash equivalents + Short-term marketable debt securities - debt) Microsoft is actually buying company for $31billion which is very reasonable considering the company's long term strategic shift of its business focus.

Stakeholders Interest

The possible deal has already benefited the stakeholders due to rising prices of yahoo shares.

In my view it will be in best interest stakeholders, Yahoo and Microsoft itself, if Microsoft instead of merging Yahoo with itself treat it as independent listed company, buy strategic, even majority stack in Yahoo and works on strengths of both company's.

Strength of Yahoo is its user base and its leading position in search marketing second just to Google. Microsoft can transfer its entire search marketing business to Yahoo or even more it can transfer its all online content business to Yahoo and treat it as its online content provider associate or subsidiary depends on how much stack company buy in Yahoo.

Microsoft strength is its product development capability and it should take over all product development activities from Yahoo.

This type of arrangement will be benefited for everyone

For Yahoo and its stakeholders it will be benefited as this will leave its identity of public traded company intact and allow market to judge its true valuations. More over it will make yahoo much more competitive due to increased scale and synergies.

For Microsoft it will be less cash consuming deal as compare to entire takeover and will also serve its purpose of gaining control of Yahoo Inc and creating a stronghold in search marketing without initiating a major management reshuffle in Yahoo. Moreover cash saved can be used to get a good bargain later for any other company because with gloomy outlook of economy much more takeover opportunities are expected to come up in future.

Effect on biggest competitor: Google

Deal or merger whatever happen will only have negative effect on Google, as it will find all of a sudden its two nearest competitors coming together and are competing not only with scale but also with lot more operational efficiency. It may also bring in a new era of scarifying of margins to gain clients as both companies Google and merged entity (Microsoft) has enough financial strength to do so. 

Ref. :-What makes Google desperate ? Yahoo with Microsoft

This article reflects personal view of the author and one must consult its financial adviser before making any investment decision