Update: Microsoft offers to buy Yahoo for $44.6B

IDG News Service - Microsoft Corp. today offered to buy Yahoo Inc. for $44.6 billion in cash and stock to better compete with Google Inc. in the market for online services.

CEO Steve Ballmer made the offer in a letter to Yahoo's board of directors yesterday, telling the board that he would release the letter this morning.

On a conference call this morning, Microsoft's president of its Platforms & Services division Kevin Johnson called a combination of Microsoft and Yahoo a more "credible" alternative to Google in the online advertising and services market.

"By combining the assets of Microsoft and Yahoo, we can offer a more competitive choice for consumers, advertisers and publishers," he said.

The market for online advertising is increasingly dominated by one player, Microsoft said, and merging with Yahoo will allow it to offer a competitive alternative.

It was Yahoo's board that first approached Microsoft, in February 2007, according to Microsoft executives. But, Ballmer said, "a year ago, the Yahoo management team said it wasn't the right time" for such a deal.

Now, he added, a combination of the companies is needed to fight back against Google's market dominance. "This is a decision we thought about, and I personally thought about, very, very hard," Ballmer said. "The market continues to grow, and the leader keeps consolidating its position."

Johnson said that the search and online portal business requires "scale economics" to support the massive capital-equipment investments needed from a systems infrastructure standpoint, as well as the cost of research and development, engineering and support.

Currently, Johnson said, the market "is ruled by one" — i.e., Google. "The industry will be better served by having competition," he added.

Yahoo, in a statement, said its board will carefully evaluate Microsoft's proposal, which it described as unsolicited.

Microsoft expects the market for online advertising to almost double in size over the next three years, from $40 billion in 2007 to $80 billion by 2010. A merger will allow the company to realize economies of scale and reduce capital costs as it addresses this market, it said.

"The combination of these two great teams would enable us to jointly deliver a broad range of new experiences to our customers that neither of us would have achieved on our own," said Ray Ozzie, chief software architect at Microsoft, in a statement.

Microsoft expects to cut costs by $1 billion a year by realizing synergies with Yahoo in four areas: obtaining economies of scale as its audience increases; combining its research and development efforts with Yahoo's to innovate faster; eliminating operational redundancy to cut costs; and pooling expertise to innovate in video and mobile.