Steve Balmer's Acqusition Letter To Jerry Yang - Leak

[NewsBot]

http://dealbook.blogs.nytimes.com/2008/02/01/microsofts-letter-to-yahoo/

 

January 31, 2008

 

 

Board of Directors

Yahoo! Inc.

701 First Avenue

Sunnyvale, CA 94089

Attention: Roy Bostock, Chairman

Attention: Jerry Yang, Chief Executive Officer

 

Dear Members of the Board:

 

Iam writing on behalf of the Board of Directors of Microsoft to make aproposal for a business combination of Microsoft and Yahoo!. Under ourproposal, Microsoft would acquire all of the outstanding shares ofYahoo! common stock for per share consideration of $31 based onMicrosoft's closing share price on January 31, 2008, payable in theform of $31 in cash or 0.9509 of a share of Microsoft common stock.Microsoft would provide each Yahoo! shareholder with the ability tochoose whether to receive the consideration in cash or Microsoft commonstock, subject to pro-ration so that in the aggregate one-half of theYahoo! common shares will be exchanged for shares of Microsoft commonstock and one-half of the Yahoo! common shares will be converted intothe right to receive cash. Our proposal is not subject to any financingcondition.

 

Our proposal represents a 62% premium above theclosing price of Yahoo! common stock of $19.18 on January 31, 2008. Theimplied premium for the operating assets of the company clearly isconsiderably greater when adjusted for the minority, non-controlledassets and cash. By whatever financial measure you use - EBITDA, freecash flow, operating cash flow, net income, or analyst target prices -this proposal represents a compelling value realization event for yourshareholders.

 

We believe that Microsoft common stock representsa very attractive investment opportunity for Yahoo!'s shareholders.Microsoft has generated revenue growth of 15%, earnings growth of 26%,and a return on equity of 35% on average for the last three years.Microsoft's share price has generated shareholder returns of 8% duringthe last one year period and 28% during the last three year period,significantly outperforming the S&P 500. It is our view thatMicrosoft has significant potential upside given the continued solidgrowth in our core businesses, the recent launch of Windows Vista, andother strategic initiatives.

 

Microsoft's consistent belief hasbeen that the combination of Microsoft and Yahoo! clearly representsthe best way to deliver maximum value to our respective shareholders,as well as create a more efficient and competitive company that wouldprovide greater value and service to our customers. In late 2006 andearly 2007, we jointly explored a broad range of ways in which our twocompanies might work together. These discussions were based on a visionthat the online businesses of Microsoft and Yahoo! should be aligned insome way to create a more effective competitor in the onlinemarketplace. We discussed a number of alternatives ranging fromcommercial partnerships to a merger proposal, which you rejected. Whilea commercial partnership may have made sense at one time, Microsoftbelieves that the only alternative now is the combination of Microsoftand Yahoo! that we are proposing.

 

In February 2007, I received aletter from your Chairman indicating the view of the Yahoo! Board that"now is not the right time from the perspective of our shareholders toenter into discussions regarding an acquisition transaction." Accordingto that letter, the principal reason for this view was the Yahoo!Board's confidence in the "potential upside" if management successfullyexecuted on a reformulated strategy based on certain operationalinitiatives, such as Project Panama, and a significant organizationalrealignment. A year has gone by, and the competitive situation has notimproved.

 

While online advertising growth continues, there aresignificant benefits of scale in advertising platform economics, incapital costs for search index build-out, and in research anddevelopment, making this a time of industry consolidation andconvergence. Today, the market is increasingly dominated by one playerwho 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 intofour 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.

 

Wewould value the opportunity to further discuss with you how to optimizethe integration of our respective businesses to create a leading globaltechnology company with exceptional display and search advertisingcapabilities. You should also be aware that we intend to offersignificant retention packages to your engineers, key leaders andemployees across all disciplines.

 

We have dedicated considerabletime and resources to an analysis of a potential transaction and areconfident that the combination will receive all necessary regulatoryapprovals. We look forward to discussing this with you, and both ourinternal legal team and outside counsel are available to meet with yourcounsel at their earliest convenience.

 

Our proposal is subjectto the negotiation of a definitive merger agreement and our having theopportunity to conduct certain limited and confirmatory due diligence.In addition, because a portion of the aggregate merger considerationwould consist of Microsoft common stock, we would provide Yahoo! theopportunity to conduct appropriate limited due diligence with respectto Microsoft. We are prepared to deliver a draft merger agreement toyou and begin discussions immediately.

 

In light of thesignificance of this proposal to your shareholders and ours, as well asthe potential for selective disclosures, our intention is to publiclyrelease the text of this letter tomorrow morning.

 

Due to theimportance of these discussions and the value represented by ourproposal, we expect the Yahoo! Board to engage in a full review of ourproposal. My leadership team and I would be happy to make ourselvesavailable to meet with you and your Board at your earliest convenience.Depending on the nature of your response, Microsoft reserves the rightto pursue all necessary steps to ensure that Yahoo!'s shareholders areprovided with the opportunity to realize the value inherent in ourproposal.

 

We believe this proposal represents a uniqueopportunity to create significant value for Yahoo!'s shareholders andemployees, and the combined company will be better positioned toprovide an enhanced value proposition to users and advertisers. We hopethat you and your Board share our enthusiasm, and we look forward to aprompt and favorable reply.

 

Sincerely yours,

 

/s/ Steven A. Ballmer

Steven A. Ballmer

Chief Executive Officer

Microsoft Corporation

 

 

More...

 

View All Our Microsoft Related Feeds