It's True: Microsoft Bids $44B for Yahoo

Microsoft (MSFT) has made a $44.6 billion bid to acquire Yahoo (YHOO), laying the groundwork for a deal that would bring together the chief rivals to Internet search giant Google (GOOG). Microsoft's bid of $31 represents a 62 percent premium to Yahoo's current share price of $19.18, meaning that even if Yahoo's board resists the Microsoft offer, the company is totally in play.

Yahoo shares are trading at $30.10 in pre-market action, up 57 percent and within a dollar of Microsoft's offer. Yahoo has issued a statement saying only that its "Board of Directors will evaluate this proposal carefully and promptly in the context of Yahoo!'s strategic plans and pursue the best course of action to maximize long-term value for shareholders."

The business implications of Microsoft's offer are huge. From a data center perspective, the deal would consolidate two of the largest Internet infrastructures. In a letter to Yahoo's board, Microsoft said that "eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity." A consolidation of the two companies' networks could shift a massive amount of infrastructure from open source technologies to Microsoft platforms.

Microsoft said it has "developed a plan and process that will include the employees of both companies to focus on the integration of the combined business," and will offer retention packages to Yahoo engineers, and key employees.

"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," said Steve Ballmer, chief executive officer of Microsoft. "We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners."

Microsoft acknowledged that its bid was a response to Google's growing dominance of Internet search and advertising. "The industry will be well served by having more than one strong player, offering more value and real choice to advertisers, publishers and consumers," said Kevin Johnson, president of the Platforms & Services Division of Microsoft.

There have been repeated rumors of interest in a Microsoft-Yahoo deal. Microsoft's letter notes that the two companies previously discussed a deal in 2006 and 2007. In February 2007 MYahoo said it was "not the right time" for a deal.

On the infrastructure side, the deal could have significant implications for the open source community, where Yahoo has been a major player in several projects. Most of Yahoo's infrastructure runs on FreeBSD, and the lead developer of PHP, Rasmus Lerdorf, works as an engineer at Yahoo. Yahoo has also been a major contributor to Hadoop, an open source technology for distributed computing.

In addition to its search and advertising operations, Yahoo runs the Internet's busiest news portal, including a lucrative financial news site. Yahoo also owns leading Web 2.0 properties including the social bookmarking site Del.icio.us, photo sharing service Flickr, blog networking platform MyBlogLog and widget maker Konfabulator (now Yahoo Widgets). Flickr and MyBlogLog currently run on Linux.

Yahoo reportedly has 25 to 30 data centers around the world. Both Microsoft and Yahoo opened new data centers in Quincy, Washington last year. Would both facilities be necessary in a merged infrastructure? There are far more questions that answers at this early point.

For additional background on the two companies' infrastructure, see these stories: