Friday, February 1, 2008

Internet era is entering a tumultuous new phase

--The software giant's unsolicited offer for Yahoo represents a 62% premium over the Internet company's recent share price and is a sign of Microsoft's determination to narrow Google's growing lead in the online advertising and Web search-engine wars. --By absorbing Yahoo, Microsoft hopes to gain the heft it has long sought with consumers, advertisers and other online publishers, providing access to roughly 500 million world-wide monthly users of Yahoo's Internet services. These range from email to online dating and help generate Yahoo's roughly 16% share of total U.S. online ad revenue. --Mr. Ballmer is taking Microsoft into waters braved only once before in the technology world: the ill-fated 2001 merger between AOL and Time Warner. Microsoft has been hesitant to make hostile bids since its founding in 1975. It would be the biggest deal financially in Microsoft's history and carry immense complexity: Mr. Ballmer will need to pull Yahoo's 14,300 employees into Microsoft's already-swelling ranks of 80,000 people. That challenge could mean job cuts at either Microsoft, Yahoo or both companies. --While combining the companies would pose enormous management and technical challenges, a Yahoo acquisition could make Microsoft a more viable one-stop alternative to Google for advertisers and media companies looking to spend money and distribute their content online. It could also help buttress Microsoft's core software business against encroachment by Google as more consumers access services and applications over the Web instead of installing software on their PCs. --The deal, more broadly, would reshape the competition among many other Web, media and telecommunications players. --For Microsoft, the move is an acknowledgment that its expensive foray into online services is failing, or at least not moving fast enough. The company has tried to build a strong presence in Internet search and other online services. But it hasn't dented Google's leading market share or stayed in step with the growth of online advertising. --Microsoft said that the union could result in at least $1 billion in annual savings. --The deal, meanwhile, could potentially be bad news for some smaller Internet players such as Time Warner Inc.'s AOL and IAC/InterActiveCorp's search engine. Both could see themselves marginalized with consumers and advertisers. --Microsoft's $44.6 billion bid for Yahoo ranks as the second-largest among technology and media deals, only surpassed by America Online Inc.'s $112 billion deal to buy Time Warner Inc. in 2000, according to Dealogic. It would rank as the biggest-ever pure technology deal, nearly two times as big as Lucent Technologies' $23.9 billion purchase of Ascend Communications Inc. in 1999 and eclipsing Hewlett-Packard's $19 billion acquisition of Compaq Computer Corp. in 2002, the research firm says.

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