| Microsoft
chief software architect Ray Ozzie says, "Our
lives, our businesses, and even our society
have been progressively transformed by the
Web, and Yahoo! has played a pioneering role
by building compelling, high-scale services
and infrastructure. The combination of these
two great teams would enable us to jointly
deliver a broad range of new experiences to
our customers that neither of us would have
achieved on our own.”
The
online ad market is growing at a very fast
pace, from over $40 billion in 2007 to nearly
$80 billion by 2010. The resulting benefits
of scale along with the associated capital
costs for advertising platform providers
make this a time of industry consolidation
and convergence. Today, this market is increasingly
dominated by one player. Microsoft says
that, in collaboration with Yahoo!, it can
offer a competitive choice while better
fulfilling the needs of customers and partners.
Microsoft
president of the platforms and services
division Kevin Johnson says, “The combined
assets and strong services focus of these
two companies will enable us to achieve
scale economics while reaching R&D critical
mass to deliver innovation breakthroughs.
“The industry will be well served by
having more than one strong player, offering
more value and real choice to advertisers,
publishers and consumers.”
The
combination, Microsoft explains, will create
a more efficient company with synergies
in four areas: scale economics driven by
audience critical mass and increased value
for advertisers; combined engineering talent
to accelerate innovation; operational efficiencies
through elimination of redundant cost; and
the ability to innovate in emerging user
experiences such as video and mobile. Microsoft
believes that these four areas will generate
at least $1 billion in annual synergy for
the combined entity.
Microsoft
has developed a plan and process that will
include the employees of both companies
to focus on the integration of the combined
business. Microsoft intends to offer significant
retention packages to Yahoo! engineers,
key leaders and employees across all disciplines.
Microsoft
adds that it believes that this proposed
combination would receive all necessary
regulatory approvals and expects that the
proposed transaction would be completed
in the second half of 2008.
Microsoft
says that it is also committed to working
closely with Yahoo! management and its board
of directors as they, along with Yahoo!
shareholders, evaluate this compelling proposal.
In
a letter sent to Yahoo!'s board of directors,
Ballmer says, "We believe that Microsoft
common stock represents a very attractive
investment opportunity for Yahoo!’s
shareholders. Microsoft has generated revenue
growth of 15 per cent, earnings growth of
26 per cent, and a return on equity of 35
per cent on average for the last three years.
"Microsoft’s
share price has generated shareholder returns
of eight per cent during the last one year
period and 28 per cent during the last three
year period, significantly outperforming
the S&P 500. It is our view that Microsoft
has significant potential upside given the
continued solid growth in our core businesses,
the recent launch of Windows Vista, and
other strategic initiatives.
"While
online advertising growth continues, there
are significant benefits of scale in advertising
platform economics, in capital costs for
search index build-out, and in research
and development, making this a time of industry
consolidation and convergence. Today, the
market is increasingly dominated by one
player who is consolidating its dominance
through acquisition. Together, Microsoft
and Yahoo! can offer a credible alternative
for consumers, advertisers, and publishers.
Synergies of this combination fall into
four areas:
"Scale
economics: This combination enables synergies
related to scale economics of the advertising
platform where today there is only one competitor
at scale. This includes synergies across
both search and non-search related advertising
that will strengthen the value proposition
to both advertisers and publishers. Additionally,
the combination allows us to consolidate
capital spending.
"Expanded
R&D capacity: The combined talent of
our engineering resources can be focused
on R&D priorities such as a single search
index and single advertising platform. Together
we can unleash new levels of innovation,
delivering enhanced user experiences, breakthroughs
in search, and new advertising platform
capabilities. Many of these breakthroughs
are a function of an engineering scale that
today neither of our companies has on its
own.
"Operational
efficiencies: Eliminating redundant infrastructure
and duplicative operating costs will improve
the financial performance of the combined
entity.
"Emerging
user experiences: Our combined ability to
focus engineering resources that drive innovation
in emerging scenarios such as video, mobile
services, online commerce, social media,
and social platforms is greatly enhanced.
"We
would value the opportunity to further discuss
with you how to optimise the integration
of our respective businesses to create a
leading global technology company with exceptional
display and search advertising capabilities.
You should also be aware that we intend
to offer significant retention packages
to your engineers, key leaders and employees
across all disciplines.
"We
have dedicated considerable time and resources
to an analysis of a potential transaction
and are confident that the combination will
receive all necessary regulatory approvals.
We look forward to discussing this with
you, and both our internal legal team and
outside counsel are available to meet with
your counsel at their earliest convenience."
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