Microsoft’s Attempt to Acquire Yahoo Case Study Analysis

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Subject: Microsoft's Attempt to Acquire Yahoo - A Comprehensive Case Memo

Introduction

This memorandum delves into the captivating case of Microsoft's ambitious endeavor to acquire Yahoo in 2008, and the pivotal decision made by Yahoo's CEO, Jerry Yang, to reject a substantial 70% premium offer. The case provides valuable insights into the intricate dynamics of corporate strategy, personal stakes, and the multifaceted elements that influence major business decisions.

For The Buck Case

Who and why?

- Buyers: Microsoft, a major technology company.

- Sellers: Yahoo, an internet services company.

Microsoft's intention to acquire Yahoo was fundamentally rooted in bolstering its presence within the online advertising and search engine sectors. The merger with Yahoo was a strategic move aimed at establishing a more formidable contender against Google, which held a dominant position in these markets. Microsoft's overarching objective was to improve its online services and advertising competencies to gain a larger portion of the digital advertising market.

Yahoo's management and board faced challenges in growing their business and competing effectively with Google. They saw a potential acquisition by Microsoft as a way to revitalize the company and achieve better financial performance. The deal could also provide Yahoo shareholders with a premium for their shares.

What?

Incorporating Yahoo into its team was essential for Microsoft to elevate its standing in the online advertising and search markets. By merging, they could expand their reach and benefit from a wider audience, heightened advertising potential, stronger ways to monetize, and access to crucial user information. This presented an advantageous opportunity for both Microsoft and the industry as a whole, as it aimed to boost Microsoft's position in the industry while invigorating Yahoo's presence as a company.

Where and when?

Relevant Market/Industry Conditions: In the world of online advertising and search, the scene was rife with competition, with Google reigning supreme. Microsoft and Yahoo struggled to make meaningful inroads and find success in monetizing their offerings. With the industry changing rapidly, there was a looming sense of pressure to compete and keep up with the times.

Relevant Country Conditions: The acquisition deal involved two major U.S.-based technology companies, which meant that U.S. regulatory and legal considerations were highly relevant. Additionally, the global reach of these companies made international regulatory and market conditions important.

When: The case took place in 2008 when the global economy was experiencing challenges, including the early stages of a financial crisis. This economic backdrop may have influenced the strategic decisions and negotiations between Microsoft and Yahoo.

Value of Yahoo as a Standalone Company

In 2008, financial models by Morgan Stanley, Jefferies, and Bear Stearns estimated Yahoo's standalone value at $8,177 million. Analysts projected Yahoo's worth to be around $8.18 billion based on financial forecasts. However, real value depends on operational efficiency, competitive conditions, and economic factors.

Value of Yahoo as a Division under Microsoft

In January 2008, the estimated value of Yahoo as a division under Microsoft was approximately $6,629.15 million. This assessment considered multiple factors and used projections with a 3% growth rate. Cash flows were discounted to their present values using Microsoft's 10% WACC, and an annual synergy of $0.5 billion was assumed, starting in 2009.

The analysis totaled the present values of future cash flows and synergies for the years 2008 to 2017. This estimate questioned whether Microsoft's $44.6 billion acquisition offer was justified based on the perceived value of Yahoo under Microsoft's ownership.

Microsoft’s $31 per Share Offer is justified

Microsoft's $31 per share offer for Yahoo seems significantly higher than the calculated stock price of approximately $0.102 per share based on the valuation, raising questions about its justification from a purely valuation standpoint. However, Microsoft's offer could be influenced by other factors which include strategic value, market position, user base and data, thwarting competitors, and extended growth prospects.

The Rejection of a 70% premium

Jerry Yang and the board believed that Microsoft's offer undervalued Yahoo. Yahoo was committed to strategic independence, seeking to revitalize the company on its terms. Exploration of alternative strategies was underway, including potential partnerships. The challenges of integrating with Microsoft and potential regulatory hurdles contributed to the rejection.........

Microsoft’s Attempt to Acquire Yahoo Case Study Analysis

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