Early this morning we got news that Microsoft sent an offer to buy Yahoo. Microsoft is paying more than anyone else would be willing to pay for Yahoo. The bid is $44.6 billion, or $31 a share, in cash and stock. Thursday, Yahoo closed at $19.18, a market value of $25.6 billion. If you take out the value of Yahoo’s holdings in other public companies—which the company estimates to be worth $14 billion or $10 a share—that means that Microsoft is offering to pay more than double the value of Yahoo’s existing business.
This bid makes sense for Microsoft from the point of view of strategic survival. Its search and Internet operations are not getting traction. By far, its best option is to combine with Yahoo to create the dominant No. 2 in online advertising and Internet search. But can these to combined really be enough to take on Google? That sort of deal requires that Yahoo make the case to shareholders that the future of one of these combinations is worth more now than $31 a share today.
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