Microsoft Proposes Acquisition of Yahoo! for $31 per Share



    
    Transaction valued at approximately $44.6 billion in cash and stock;

    Provides 62 percent premium to current trading price for Yahoo!
    shareholders;

    Combined entity to create a more competitive company while providing
    superior value to shareholders and better choice and innovation for
    customers and partners
    

    REDMOND, Wash., Feb. 1 /CNW/ -- Microsoft Corp. (Nasdaq:   MSFT) today
announced that it has made a proposal to the Yahoo! Inc. (Nasdaq:   YHOO) Board
of Directors to acquire all the outstanding shares of Yahoo! common stock for
per share consideration of $31 representing a total equity value of
approximately $44.6 billion. Microsoft's proposal would allow the Yahoo!
shareholders to elect to receive cash or a fixed number of shares of Microsoft
common stock, with the total consideration payable to Yahoo! shareholders
consisting of one-half cash and one-half Microsoft common stock. The offer
represents a 62 percent premium above the closing price of Yahoo! common stock
on Jan. 31, 2008.
    "We have great respect for Yahoo!, and together we can offer an
increasingly exciting set of solutions for consumers, publishers and
advertisers while becoming better positioned to compete in the online services
market," said Steve Ballmer, chief executive officer of Microsoft. "We believe
our combination will deliver superior value to our respective shareholders and
better choice and innovation to our customers and industry partners."
    "Our lives, our businesses, and even our society have been progressively
transformed by the Web, and Yahoo! has played a pioneering role by building
compelling, high-scale services and infrastructure," said Ray Ozzie, chief
software architect at Microsoft. "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."
    The online advertising market is growing at a very fast pace, from over
$40 billion in 2007 to nearly $80 billion by 2010. The resulting benefits of
scale along with the associated capital costs for advertising platform
providers make this a time of industry consolidation and convergence. Today
this market is increasingly dominated by one player. Together, Microsoft and
Yahoo! can offer a competitive choice while better fulfilling the needs of
customers and partners.
    "The combined assets and strong services focus of these two companies
will enable us to achieve scale economics while reaching R&D critical mass to
deliver innovation breakthroughs," said Kevin Johnson, president of the
Platforms & Services Division of Microsoft. "The industry will be well served
by having more than one strong player, offering more value and real choice to
advertisers, publishers and consumers."
    The combination will create a more efficient company with synergies in
four areas: scale economics driven by audience critical mass and increased
value for advertisers; combined engineering talent to accelerate innovation;
operational efficiencies through elimination of redundant cost; and the
ability to innovate in emerging user experiences such as video and mobile.
Microsoft believes these four areas will generate at least $1 billion in
annual synergy for the combined entity.
    Microsoft has developed a plan and process that will include the
employees of both companies to focus on the integration of the combined
business. Microsoft intends to offer significant retention packages to Yahoo!
engineers, key leaders and employees across all disciplines.
    Microsoft believes this proposed combination would receive all necessary
regulatory approvals and expects that the proposed transaction would be
completed in the second half of calendar year 2008.
    Microsoft is also committed to working closely with Yahoo! management and
its Board of Directors as they, along with Yahoo! shareholders, evaluate this
compelling proposal.

    Below is the text of the letter that Microsoft sent to Yahoo!'s Board of
Directors:

    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:
    
    I am writing on behalf of the Board of Directors of Microsoft to make a
proposal for a business combination of Microsoft and Yahoo!.  Under our
proposal, Microsoft would acquire all of the outstanding shares of Yahoo!
common stock for per share consideration of $31 based on Microsoft's closing
share price on January 31, 2008, payable in the form of $31 in cash or 0.9509
of a share of Microsoft common stock.  Microsoft would provide each Yahoo!
shareholder with the ability to choose whether to receive the consideration in
cash or Microsoft common stock, subject to pro-ration so that in the aggregate
one-half of the Yahoo! common shares will be exchanged for shares of Microsoft
common stock and one-half of the Yahoo! common shares will be converted into
the right to receive cash.  Our proposal is not subject to any financing
condition.
    Our proposal represents a 62% premium above the closing price of Yahoo!
common stock of $19.18 on January 31, 2008.  The implied premium for the
operating assets of the company clearly is considerably greater when adjusted
for the minority, non-controlled assets and cash.  By whatever financial
measure you use - EBITDA, free cash flow, operating cash flow, net income, or
analyst target prices - this proposal represents a compelling value
realization event for your shareholders.
    We believe that Microsoft common stock represents a 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% during the last one year period and 28% during the
last three year period, significantly outperforming the S&P 500.  It is our
view that Microsoft has significant potential upside given the continued solid
growth in our core businesses, the recent launch of Windows Vista, and other
strategic initiatives.
    Microsoft's consistent belief has been that the combination of Microsoft
and Yahoo! clearly represents the best way to deliver maximum value to our
respective shareholders, as well as create a more efficient and competitive
company that would provide greater value and service to our customers.  In
late 2006 and early 2007, we jointly explored a broad range of ways in which
our two companies might work together.  These discussions were based on a
vision that the online businesses of Microsoft and Yahoo! should be aligned in
some way to create a more effective competitor in the online marketplace.  We
discussed a number of alternatives ranging from commercial partnerships to a
merger proposal, which you rejected.  While a commercial partnership may have
made sense at one time, Microsoft believes that the only alternative now is
the combination of Microsoft and Yahoo! that we are proposing.
    In February 2007, I received a letter from your Chairman indicating the
view of the Yahoo! Board that "now is not the right time from the perspective
of our shareholders to enter into discussions regarding an acquisition
transaction."  According to that letter, the principal reason for this view
was the Yahoo! Board's confidence in the "potential upside" if management
successfully executed on a reformulated strategy based on certain operational
initiatives, such as Project Panama, and a significant organizational
realignment.  A year has gone by, and the competitive situation has not
improved.
    While online advertising growth continues, there are significant benefits
of scale in advertising platform economics, in capital costs for search index
build-out, and in research and development, making this a time of industry
consolidation and convergence.  Today, the market is increasingly dominated by
one player who 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 into four
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.
    
    We would value the opportunity to further discuss with you how to
optimize the integration of our respective businesses to create a leading
global technology company with exceptional display and search advertising
capabilities.  You should also be aware that we intend to offer significant
retention packages to your engineers, key leaders and employees across all
disciplines.
    We have dedicated considerable time and resources to an analysis of a
potential transaction and are confident that the combination will receive all
necessary regulatory approvals.  We look forward to discussing this with you,
and both our internal legal team and outside counsel are available to meet
with your counsel at their earliest convenience.
    Our proposal is subject to the negotiation of a definitive merger
agreement and our having the opportunity to conduct certain limited and
confirmatory due diligence.  In addition, because a portion of the aggregate
merger consideration would consist of Microsoft common stock, we would provide
Yahoo! the opportunity to conduct appropriate limited due diligence with
respect to Microsoft.  We are prepared to deliver a draft merger agreement to
you and begin discussions immediately.
    In light of the significance of this proposal to your shareholders and
ours, as well as the potential for selective disclosures, our intention is to
publicly release the text of this letter tomorrow morning.
    Due to the importance of these discussions and the value represented by
our proposal, we expect the Yahoo! Board to engage in a full review of our
proposal.  My leadership team and I would be happy to make ourselves available
to meet with you and your Board at your earliest convenience.  Depending on
the nature of your response, Microsoft reserves the right to pursue all
necessary steps to ensure that Yahoo!'s shareholders are provided with the
opportunity to realize the value inherent in our proposal.
    We believe this proposal represents a unique opportunity to create
significant value for Yahoo!'s shareholders and employees, and the combined
company will be better positioned to provide an enhanced value proposition to
users and advertisers.  We hope that you and your Board share our enthusiasm,
and we look forward to a prompt and favorable reply.

    Sincerely yours,

    
    /s/ Steven A. Ballmer
    Steven A. Ballmer
    Chief Executive Officer
    Microsoft Corporation
    
    Microsoft will host an analyst/investor conference call at 8:30 a.m.
Eastern Time/5:30 a.m. Pacific Time to discuss today's announcement. If you
want to participate, you may do so by dialing (866) 610-1072 or (706) 634-9230
(toll/international); the conference ID number is 33470390. Please dial in at
least 20 minutes in advance of the call. Accompanying slides and the
conference call Webcast will be available at
http://www.microsoft.com/presspass. Playback of the conference call and the
webcast will be available for replay through the close of business on Feb. 5,
2008. The replay can be accessed by dialing (800) 642-1687 or (706) 645-9291
(toll/international); the conference ID number is 33470390.
    
    About Microsoft
    
    Founded in 1975, Microsoft (Nasdaq:   MSFT) is the worldwide leader in
software, services and solutions that help people and businesses realize their
full potential.
    This communication does not constitute an offer to sell or the
solicitation of an offer to buy any securities or a solicitation of any vote
or approval. In connection with the proposed transaction, Microsoft Corp.
plans to file with the SEC a registration statement on Form S-4 containing a
proxy statement/prospectus and other documents regarding the proposed
transaction. The definitive proxy statement/prospectus will be mailed to
shareholders of Yahoo! Inc. INVESTORS AND SECURITY HOLDERS OF YAHOO! INC. ARE
URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND OTHER DOCUMENTS FILED WITH
THE SEC CAREFULLY IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY
WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
    Investors and security holders will be able to obtain free copies of the
registration statement and the proxy statement/prospectus (when available) and
other documents filed with the SEC by Microsoft Corp. through the Web site
maintained by the SEC at http://www.sec.gov. Free copies of the registration
statement and the proxy statement/prospectus (when available) and other
documents filed with the SEC can also be obtained by directing a request to
Investor Relations Department, Microsoft Corp., One Microsoft Way, Redmond,
Wash. 98052-6399.
    Microsoft Corp. and its directors and executive officers and other
persons may be deemed to be participants in the solicitation of proxies in
respect of the proposed transaction. Information regarding Microsoft Corp.'s
directors and executive officers is available in its Annual Report on Form
10-K for the year ended June 30, 2007, which was filed with the SEC on Aug. 8,
2007, and its proxy statement for its 2007 annual meeting of shareholders,
which was filed with the SEC on Sept. 29, 2007. Other information regarding
the participants in the proxy solicitation and a description of their direct
and indirect interests, by security holdings or otherwise, will be contained
in the proxy statement/prospectus and other relevant materials to be filed
with the SEC when they become available.
    Statements in this release that are "forward-looking statements" are
based on current expectations and assumptions that are subject to risks and
uncertainties. Actual results could differ materially because of factors such
as Microsoft Corp.'s ability to achieve the synergies and value creation
contemplated by the proposed transaction, Microsoft Corp.'s ability to
promptly and effectively integrate the businesses of Yahoo! Inc. and Microsoft
Corp., the timing to consummate the proposed transaction and any necessary
actions to obtain required regulatory approvals, and the diversion of
management time on transaction-related issues. For further information
regarding risks and uncertainties associated with Microsoft Corp.'s business,
please refer to the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Risk Factors" sections of Microsoft
Corp.'s SEC filings, including, but not limited to, its annual report on Form
10-K and quarterly reports on Form 10-Q, copies of which may be obtained by
contacting Microsoft Corp.'s Investor Relations department at (800) 285-7772
or at Microsoft Corp.'s Web site at http://www.microsoft.com/msft.
    All information in this communication is as of Feb. 1, 2008. Microsoft
Corp. undertakes no duty to update any forward-looking statement to conform
the statement to actual results or changes in the company's expectations.
    
    For more information, press only:
    
    Rapid Response Team, Waggener Edstrom Worldwide, (503) 443-7070,
rrt@waggeneredstrom.com
    Joele Frank, Wilkinson Brimmer Katcher: Joele Frank/Eric Brielmann/Jamie
Moser, (212) 355-4449
    
    Financial analysts and investors only:
    Colleen Healy, General Manager, Investor Relations, (425) 706-3703
    
    Note to editors: If you are interested in viewing additional information
on Microsoft, please visit the Microsoft Web page at
http://www.microsoft.com/presspass on Microsoft's corporate information pages.
Web links, telephone numbers and titles were correct at time of publication,
but may since have changed. For additional assistance, journalists and
analysts may contact Microsoft's Rapid Response Team or other appropriate
contacts listed at http://www.microsoft.com/presspass/contactpr.mspx.




For further information:

For further information: Rapid Response Team, Waggener Edstrom
Worldwide,  +1-503-443-7070, rrt@waggeneredstrom.com; Joele Frank, or Eric
Brielmann, or  Jamie Moser, Joele Frank, Wilkinson Brimmer Katcher,
+1-212-355-4449; Financial  analysts and investors only: Colleen Healy,
General Manager, Investor Relations,  +1-425-706-3703, all for Microsoft Corp
Web Site: http://www.microsoft.com/presspass


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