Archive for February, 2008

Microsoft’s Hostile Acquisition of Yahoo: Impact on the M&A Market

Posted on Saturday, 2 February 2008. Filed under: Commentary, Mergers |

What a difference a day makes.

Talking to most M&A bankers, you would think that although they are very busy, there wasn’t much to look forward to in 2008.  Then another deal comes along that captures the public’s attention.  Nothing like a story that includes names such as Bill Gates, Yahoo, Microsoft and the two M&A heavyweights, Morgan Stanley and Goldman Sachs.

At almost $45 billion, this technically may be the largest tech deal ever (see The New York Times DealBook which has an excellent discussion about why this is the largest exclusively technology M&A deal ever — surpassing the Lucent acquisition of Ascend in 1999 — but being smaller than the largest tech-media deal ever, the ill-famed Time Warner AOL deal in 2000 valued at over $112 billion).  But more important is the attention it will get.

What are the issues other than for the popular press that will jump on any story that keeps Bill Gates in the news?

First, the deal will go through.  The potential for this deal has been around for a while, as have rumours of such a deal (see another story from The New York Times DealBook covering the history of the deal’s rumours).  It first surfaced in May 2006, and at that time the deal rumour was quashed with the following quote from Yahoo:

“Microsoft taking over Yahoo — that conversation has never come up,” Yahoo’s then-CEO Terry Semel told New Yorker writer Ken Auletta. “[We discussed] search, and Microsoft co-owning some of our search. I will not sell a piece of search. It is like selling your right arm while keeping your left — it does not make any sense.”

There is certainly going to be anti-trust (US) and competition (EU) concerns, but this deal is not inherently anti-competitive and in fact creates greater competition against Google’s hegemony in a number of markets.  But just because of their size, it can be expected that a tie-up between Yahoo and Microsoft will draw attention from the authorities, which may delay the closing beyond the normally expected 6 months for such a deal.

Second, it breathes new life into the market.  The advisors — Morgan Stanley and Blackstone confirmed on the Microsoft side and Goldman Sachs reportedly on the Yahoo side — will certainly provide each with nice fees (perhaps on the order of $25 million each).  Given the turmoil in the market, this will pay some bonuses, but certainly doesn’t go very far in offsetting the recent write-down from the sub-prime crisis. 

Shareholders in Yahoo will certainly benefit.  Microsoft’s bear hug bid with a 62% premium was designed to make sure that other bidders won’t appear to challenge it’s offer.  The market seems to agree, with the shares closing yesterday under the offer price of $31 per share.  Microsoft clearly intended this as proven by CFO Chris Liddell comment quoted in the Wall Street Journal’s article entitled ‘Microsoft’s Offer looks like a Knock-Out Punch’: “Clearly we believe the offer is a very attractive one from a Yahoo! shareholder perspective. We struck it in a way that we think will make it attractive.” Naturally, Microsoft’s share price declined (in this case, 6%) as happens to most bidders, as the market does also know that most M&A deals fail and this one has a high potential to do so, too.

Which brings us to the post-merger period, assuming the deal does proceed.  There will be a lot of blood.  Despite comments from Microsoft about how many new engineers it needs and how valuable Yahoo’s personnel will be, all such deals include significant redundancies — often as high as 10-15% of the combined workforces.  Those in the back-office are particularly at risk, of course, but also those in the front office, too, should be looking at whether they are likely to be survivors of a merger — even those in the acquirer, Microsoft.

Regarding the integration, note the excellent interview from The Seattle Times with Kevin Johnson, president of Microsoft’s Platforms and Services Division.  Unsurprisingly, he does downplay the cultural differences (VERY large) and potential redundancies.  Yahoo has over 14,000 employees and Microsoft has approximately 80,000 employees.  That would imply almost 10,000 people being fired.  That would populate a reasonably-sized town!

Saul Hansell at The New York Times commented that it looks like trying to build a space ship out of spare parts (see ‘Microsoft is Building a Spaceship out of Spare Parts’).  But isn’t that what dreams are made of?

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