Internet provision is fast becoming a challenging industry. The providers of internet service in terms of searching and software sales are finding themselves in grueling fights for market share. For instance, as of March 2007, Google had a market share of 54% in terms of search engine with yahoo at 22% and MSN following at 10%. The above percentages also reflect the advertising revenues that each of the companies take in. Thus, talks and speculations of an historical merger between Microsoft and Yahoo have been rive. The main reason for the merger has been to increase the competitiveness of the company in terms of fighting for a market share that is highly dominated by Google.
Despite the merger being viewed as historical, the million dollar question is over and above trying to compete with the main challenger Google Inc; will the merger increase the worth of the two companies in terms of shareholder returns? Truly, web-search advertising is consuming much of the ad budget and with Google leading in web-search, this too confirms the advertising revenues, an accelerator to the merger. However, Microsoft rubbishes the merger reports with a clarification that this is a planned partnership that is planned at stepping up an alliance to challenge Google Inc in web-search market. The following are the benefits that the merger would make for the shareholders.
A) Increasing competitiveness
The proposed sale of Yahoo’s search business to Microsoft Corp at $15bn is a good offer according to Ivory Investment Management, a major shareholder of Yahoo Inc with 1.5% of all Yahoo Inc shares. The investor says that the merger will improve the competitiveness of Web-search as the two firms need each other to compete effectively with Google Inc in web-search business (Gaither, 2008). By increasing the market share, this translates to increased advertising revenue for the shareholders of the two companies. Evidently, according to marketing analysts, web-search advertising is consuming a huge budget of most firms’ advertising channel preferences (Newcomb, 2008). Thus, it is inevitable that the merger comes at a great time.
The entry by Google to Microsoft Corp traditional market of application software through the Google Apps is an indicator of a looming competition battle ground between Google Inc and Microsoft Corp. Thus, a merger is the only mitigation effort of increasing product relevancy and revenue in flows (Albanesius, 2007). So far, Yahoo has an established a content network and thus a partnership with MSN will improve delivery. It is widely accepted that Yahoo Inc has great strength in local searching. Combining the Yahoo organic strength and MSN’s superior quality paid search is a recipe to a great product that will capture consumers, publishers and advertisers to make the two companies capture a critical market share now under the disposal of Google Inc (Newcomb, 2008).
B) Reduction in operating costs
A big chunk of many company revenues are consumed by operating costs. This is even worse when the companies in question have a lower market share. This is the case of Yahoo Inc and Microsoft Corp. As noted above, the web-search market share has Google leading at 54% and Yahoo at 22% with MSN coming last at 10% (Albanesius, 2007). The operating costs of Yahoo and Microsoft are high while sustaining comparatively a low market share. The merger thus offers an opportunity of joining the efforts of the two companies in terms of sharing the operating cost budget (Gaither, 2008).Definitely, this is a benefit to shareholders as this translates to increased profitability (Wash, 2008). In this case, joining forces to share the operating costs and challenging Google in the web-search market is a move that makes the two companies improve returns on investment, a concern for all investors.
C) Increased stock price
The merger is termed as historic, largest in the corporate world and the same makes the appetite for the shares high among investors. Thus, the move is a culmination of increasing the value for both companies in terms of share prices which reflect a company’s worth. In fact, the yahoo tender offer to Microsoft is significantly going top reduce the number of outstanding shares, a boost to Yahoo Inc company shares which are predicted to possibly hit $29. This is a good deal for a company that previously was offered a slightly smaller figure to be fully acquired by Microsoft Inc. The offer is irresistible for both the Yahoo Inc and Microsoft Corp.
In early 2008, Microsoft Corp proposed to buy the outstanding shares of Yahoo at $31 making the total equity of yahoo to hit a record high of $44.6bn. During this time, the offer was at a 62% premium price given thatYahoo shares were trading at $19.18 per share. The driving force is for Microsoft to increase the existing internet solutions for its consumers, publishers and advertisers and by a far extent enhance the company’s competitiveness on online services market (Vascellaro & Nick, 2009). The management of Microsoft Corp believes that the joined forces between the two firms will deliver superior value to respective shareholders and a better choice and modernization to customers and industry partners.
The current recession is making many companies in the internet industry to consider minor partnerships. However, the paramount looming merger between the two giant firms, Microsoft Corp and Yahoo Inc, is bound to aid the company in drawing more viewers to its websites and thus advertisements coupled with innovative internet solutions that they are going to deliver to customers and stakeholders (Newcomb, 2008). The ultimate effect is lucratively impressive stock prices and thus increased company worth. This is the ultimate desire of respective shareholders of the two giant firms.
D) Improved efficiency
According to Gaither (2008), the cash infusion of $15bn to Yahoo Inc is very spectacular in improving efficiency of the company. This money is essential for Yahoo to make investments in strategic critical areas. Many investors believe that Yahoo would significantly put together Microsoft’s capabilities and assist the company in aggressively moving into the market place to search out for new markets (Albanesius, 2007). This is essential in challenging the dominance of Google Inc in the web-search market segment.The main challenger acquisition of DoubleClick in 2007 shows it efforts of increasing market dominance. The slow growth of Microsoft Corp’s software makes necessary for the company to diversify into internet advertising as a means of generating revenue. In this case, to fulfill the desire of diversifying and increasing competence in web-search, the two companies ought to merge (Vascellaro & Nick, 2009). Yahoo has established web-search infrastructure and customer loyalty. This can assist the two companies in improving a joint efficiency.
E) Hybrid management and Returns
As efforts of ensuring increased profitability are pursued, it is sequential to point that the merger will add a flare of management experience into the cooperation of the two companies. Both Yahoo Inc and Microsoft Corp have admirable wealth of experience from individual managements that have guided each company in the respective sector (Wash, 2008). Microsoft Corp has been dominant in software solution development while yahoo is a formidable force in the web-search industry. By joining forces and combining the management experience as well as styles of management, the shareholder returns are bound top increase. This is because it is easier to face a giant competitor in a merger arrangement for Yahoo Inc and Microsoft Corp than at individual capacities (Vascellaro & Nick, 2009).As of today, talks are at a critical stage on the content sharing between the two companies. Yahoo Inc shareholders will receive increased returns. For instance, in the trading year ended 2008, Microsoft Corp had a 15% revenue growth, 26% increase in earnings, and a three year average return on equity of 35% (Wash, 2008). Ideally in the same period, Microsoft’s share price generated a return of 8% in that year and an average of 28% in the previous three years. This makes the returns to respective shareholders inevitably higher after the deal.
The partnership of the two companies has been a matter of speculation in the last close to two years. While Microsoft Corp favors a merger arrangement, Yahoo Inc emphasizes a commercial partnership. Suspicion is the only undoing of the deal. However, the two companies understand that in order to challenge Google, then a strategic alliance is critical. The latest development is for Yahoo Inc to outsource its web-search and related advertisement to Microsoft Corp. Talks is still on going. Finally, the two companies ought to understand the need to profitably exploit the fast growing web-search advertising revenue segment and conclude alliance talks otherwise their perceived competitor Google Inc is making huge strides already.
Albanesius, C. (2007), Would a Microsoft-Yahoo Merger Work? PC World, Retrieved 16 June 2009 from: http://www.pcmag.com/article2/0,1895,2126193,00.asp
Gaither C (2008, December 11) Yahoo urged to make Microsoft search deal; A major investor says a $15-billion sale would help both companies, Los Angeles Times, p. C.3. Retrieved June 16, 2009 from Los Angeles Times database, (Document ID: 1610186111)
Newcomb, K. (2008, Feb 8) What Would a Yahoo-Microsoft Merger Look Like? Part 3 Retrieved 16 June 2008 from http://searchenginewatch.com/3628387
Vascellaro, J.E & Nick, W. (2009, April 11). Microsoft, Yahoo Hold Talks About Partnership. Wall Street Journal (Eastern Edition), p. B.1. Retrieved June 16, 2009, from ABI/INFORM Global database. (Document ID: 1677099611).
Wash R (2008, Feb 1) Microsoft Proposes Acquisition of Yahoo for $31 per Share Retrieved 16 June 2009 from http://www.microsoft.com/presspass/press/2008/feb08/02-01corpnewspr.mspx