Microsoft's $44.6bn (£22.6) bid to buy Yahoo could backfire if not executed properly, according to analysts — but the phenomenal price may be worth paying to fend off the challenge from Google.
Microsoft announced on Friday that it was making a further attempt to acquire Yahoo after approaching the company's board in February 2007. If the deal goes through — and many think it will — it could go some way to closing the gap Microsoft and Yahoo have endured between themselves and web-ad leader Google.
"Microsoft needs to beef up its content capabilities," said analyst Andy Buss of Canalys. "Google is becoming a behemoth and Microsoft has been feeling left out." As well as chipping away at Google's 75 percent share of the online-advertising market, Microsoft also wants to use Yahoo's online users to drive a move to subscription services, he said.
"Yahoo used to be a leader, but it has been struggling under the onslaught of Google's development of internet-based services," said Buss. Combining forces removes one competitor and could build an online presence that might finally reverse Google's rise, he added.
Microsoft is making no secret of the fact that it wants Yahoo not so much for its technology but its members. The online-advertising business relies on scale, pointed out Chris Liddell, chief financial officer for Microsoft, on a conference call on Friday to discuss the proposed deal.
"Microsoft's consistent belief has been that the combination of Microsoft and Yahoo clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers," wrote Microsoft chief executive Steve Ballmer in his letter to the Yahoo board.
The two companies combined can get better economies of scale, said Ballmer, to compete with Google, and "offer a credible alternative for consumers, advertisers and publishers". Microsoft is expected to use Yahoo's research and development arms to augment its own software-as-a service offerings, and combine the two user bases of Yahoo and MSN/Windows Live into one.
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