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Poynter Media Business Analyst Rick Edmonds tracks the latest industry developments.

Posted by Rick Edmonds 4:36 PM February 1, 2008

Why a Microsoft-Yahoo Deal Makes Sense

Microsoft put down a $44.6 billion takeover bid for Yahoo this morning, an amount only slightly less than the total share value of public newspaper companies. The deal makes sense to me. Here are some quick thoughts:

It is not unusual for the No. 2 and No. 3 companies in a field (in this case, search) to merge. Bulked up, they are in better shape to take on No. 1 (in this case, Google). The merger of Bank of America and NCNB in 1998 lapped Citicorp for the top spot in deposits. But the Kmart-Sears merger of 2004 may be a more apt comparison; even together, the two companies couldn't hope to catch Wal-Mart, but they were less likely to be steamrolled.

As competitors, MIcrosoft and Yahoo duplicate staff and systems. A merger could save a lot of money: Microsoft CEO Steve Ballmer estimated $1 billion a year.

The timing is right. Yahoo's stock is down -- 44 percent in a year -- as much as many newspaper companies. Founder Jerry Yang's return as CEO in mid-2007 hasn't delivered improved results or a new strategy that impresses investors.

Microsoft's offer is a robust 62 percent premium over the share price yesterday. Arguing that Yahoo's shareholders should instead wait for things to get better is not very persuasive. Like most companies, Yahoo has big institutional investors. Two such companies control 20 percent of the stock, according to Yahoo Finance.

Wall Street is a pretty good handicapper, and the majority (though not unanimous) view seems to be that Microsoft will succeed. Yahoo's stock was bid up 47.5 percent by 2 p.m. today.

The newspaper industry has a stake in the outcome. A partnership of 200 newspapers is looking for collaboration with Yahoo to provide a big boost in national online advertising this year. If the deal is as good for both sides as billed, it will go forward. But top executives on Yahoo's side could well be swept out to sea if the merger goes through -- and perhaps some of their strategic initiatives will be, too.

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