Microsoft's Yahoo Bid Targets Internet Advertising, Archrival Google

In making an unsolicited $44.6 billion bid for Web pioneer Yahoo Inc., Microsoft Corp. is trying to get a bigger piece of the fast-growing Internet advertising business and counter the growth of archrival Google Inc.

But along the way, the deal — if successful — could also dramatically change the way many consumers and businesses use the Internet.

Users of Yahoo's search, music, video and news sites, for instance, could see their accounts transferred to Microsoft services. Eventually, they might even see their Yahoo and Hotmail e-mail and instant messaging accounts merged.

The biggest change, though, would be in the Internet search business. Suddenly, Microsoft would become a more formidable player in an area where it has traditionally struggled.

"If I was Google I'd be a little bit concerned," said Dustin Wells, founder and CEO of Headspring Systems, an Austin, Texas-based software consulting company. "This would give Microsoft a lead of about two years from where they would be without it."

Businesses that advertise on the Web would see Microsoft's share of the U.S. search business going from about 10 percent to 33 percent, according to figures from tech research firm comScore Media Metrix. Google is by far the biggest search engine, handling more than 58 percent of all Internet searches.

And while Google dominates the market for text-based ads on the Web, a combined Yahoo-Microsoft would have about 25 percent of the market for display ads on the Web, compared to about 1 percent for Google, according to comScore.

"You'd go from a fragmented situation with Google having about 60 percent of the market and where (advertisers) could ignore everybody else, to one where Microsoft has (almost) 35 percent of the market and you'd have to advertise on two players," said Matt Rosoff, an analyst with Directions on Microsoft, an independent tech research firm.

The move also could result in new types of software products for consumers, some observers say. With a combined company, developers of third party software applications could integrate the best of what Yahoo has — search and display ads, for instance — with the best of what Microsoft has, such as office-related applications like Word or Excel.

"Adding Yahoo to the mix strengthens the Microsoft message ... and makes picking Microsoft a little easier," said Tony DiBenedetto, CEO of Tribridge Inc., a Tampa, Fla. software consulting firm that has offices in Atlanta, Fort Lauderdale and Austin.

In announcing the unsolicited bid early Friday, Microsoft CEO Steve Ballmer said the combined companies would create "an incredibly efficient and competitive offering for consumers, for advertisers and for publishers."

Ballmer said his desire to buy Yahoo also is a way for the company to move quickly and substantially beyond out-of-the-box software and into Web-based services — something that Microsoft has been trying to do for several years with mixed results.

"It really represents a transformation of our business," he said in a conference call with Wall Street analysts. "The Windows experience needs to increasingly embrace the Internet."

Along with being a leading Internet site, Yahoo has been pushing hard into Web-based services for phones and other mobile devices. Such initiatives could also be key for Microsoft going forward, especially since Google also is making aggressive moves into the mobile phone business.

Of course, a combined Microsoft-Yahoo is anything but guaranteed. In addition to getting approval from Yahoo shareholders, Microsoft would likely have to get approval from antitrust regulators in the United States and Europe.

In a statement, Yahoo said its board of directors would evaluate the proposal "carefully and promptly."

In a letter to Yahoo's board of directors, Ballmer pointed out that Microsoft's proposal of $31 per share was a 62 percent premium over Yahoo's stock price on Thursday.

It also comes after Yahoo announced a 23 percent drop in quarterly earnings and laid off 1,000 workers as it struggles against Google.

Late last year amid declining profits and other problems, company co-founder Jerry Yang resumed daily control of the company, replacing CEO Terry Semel. Microsoft made its bid to Yahoo late Thursday, right after Semel stepped down from Yahoo's board, where a year earlier he had rebuffed an earlier merger offer from Microsoft.

Independent technology analyst Rob Enderle said he's betting that Yahoo's board of directors will approve the deal.

"The two firms actually get along amazingly well and Yahoo hates Google probably about as much as Microsoft does," Enderle said.

At the same time, Yahoo "is in a world of hurt right now," he said. "And I think the board realizes there's not a lot of people they can bring in to fix things that aren't already working for Google or Microsoft."