Microsoft this week made an unsolicited $44.6 billion offer to purchase ailing Internet services company Yahoo, surprising investors and tech industry onlookers. But the bigger surprise was that Microsoft also confirmed long-standing rumors that it had been trying to strike a deal with Yahoo for quite some time: In a letter to Yahoo's board of directors, which Microsoft opened to the public, CEO Steve Ballmer noted that his company had been courting a Yahoo merger or acquisition since at least 2006.
"We have great respect for Yahoo, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market," Ballmer said. "We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners."
In his letter to Yahoo, Ballmer spelled out the ways in which he felt the two company's Internet properties were compatible, noting that there were "significant benefits of scale" that would help the combined companies more effectively compete with market leader Google. (Interestingly, Ballmer never mentions Google by name in this letter, however.)
Ballmer says that Microsoft would offer "significant retention packages" to all of Yahoo's engineers, key leaders, and other employees and would work with Yahoo to best integrate the company's businesses. He also noted that Microsoft had spent considerable time and resources evaluating the transaction and is confident that it will pass regulatory muster. That said, Google's difficulties purchasing DoubleClick suggest otherwise, and it's clear that Microsoft's past antitrust issues will factor into any regulatory approval as well.
The most astonishing thing about this offer, of course, is the sheer boldness of it, coming as it does after years of much smaller acquisitions. And Ballmer mentioned in his letter to Yahoo that he would be releasing the letter's full contents to the public 24 hours after presenting it to the company, a move that effectively requires Yahoo to act, one way or the other. His admission that Microsoft had been pursuing Yahoo for at least two years is also interesting, as Microsoft had always previously refused to comment on rumors of a potential Microsoft/Yahoo merger.
Yahoo, of course, has fallen on hard times. Its former CEO, Terry Semel, this week announced that he'd be stepping down as Yahoo's chairman, around the same time the company announced about 1000 layoffs. As part of the layoff announcement, Yahoo founder and CEO Jerry Yang warned of further financial "headwinds" this year, a roundabout admission that the company's turnaround plan wouldn't product results any time soon. Yang replaced Semel as CEO last year but has done surprisingly little to shake up the company and get it back on track: His CES keynote earlier this month was notably long on promise but short on details.
Microsoft has its own problems as well. While the company last week announced surprisingly strong quarterly earnings, the one business unit that continued to drag down earnings is the one responsible for its own online services, which have continued to fail miserably at the hands of their chief competitor, Google. Assuming it's possible to effectively combine Yahoo's assets with Microsoft's online services, Microsoft would be in a much better position to take on Google than they'll ever be on their own. But that's a big maybe. It's unclear whether this combination will ever make sense, let alone bring the cost savings Microsoft envisions.
