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Microsoft May Borrow Money For Yahoo Deal

     
12:36 pm on Feb 5, 2008 (gmt 0)

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Microsoft Corp said on Monday it may borrow money for the first time in its history to fund a portion of its $44.6 billion unsolicited offer for Yahoo Inc.

Microsoft Chief Financial Officer Chris Liddell said the software company may issue some debt to finance the cash portion of its 50-50 stock and cash offer for Yahoo, instead of drawing down its entire $21 billion cash pile.

"It's likely we're actually going to borrow for the first time," said Liddell in an annual strategy meeting with analysts. "It's going to be a mixture of the cash we have on hand plus debt."

Microsoft May Borrow Money For Yahoo Deal [uk.reuters.com]

1:06 pm on Feb 5, 2008 (gmt 0)

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Where does this leave projects like xbox and zune which have lived off the massive cash reserves? Just the extension of the 360's warranty cost $1.5bn, that is 1/4 of their record profit just thrown away. I don't see how all these money losing operations can continue if this deal goes through. They will no longer be able to write off massive fines as a rounding error because the shareholders are going to demand value for money.

Does anyone else think that they are underestimating the cost of integrating Yahoos services into their portfolio? If they are borrowing money for the purchase, how are they going to finance rewriting all the software?

This would mark the end of the Microsoft warchest, it is a good day for the technology industry.

The market obviously thinks the same.

[finance.yahoo.com...]

"We are on a path -- we were on a path and we will stay on that path regardless," said Ballmer.

Thank you Mr Ballmer for providing some comedy in the IT industry for the last 10 years, its been great having you. :D

1:53 pm on Feb 5, 2008 (gmt 0)

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Wow, someone is very ANTI-microsoft around here. I hope you use Apple and stick to it for good :)

Quote> The market obviously thinks the same.
The stock is down because investors have already factored in the price paid, thus wiping out a 42/44billion market cap. This is normal whenever a company buys another company, the company being bought out rises and the company buying gets watered down.

Quote>If they are borrowing money for the purchase, how are they going to finance rewriting all the software?

They have 19B in cash reserves, and just a year ago they had over 40B in cash reserves. They make about $17 billion in profit a year, so I don't see any major issues here. In the worst case, they can issue bonds or choose other alternatives.

This is NOT going to be the end of MSFT, you can come back to this thread in 5yrs time and find it will do the opposite.

GOOG is now in deep water, for years MSFT has had their focus in other areas, this BID shows how serious they are now to go after GOOG.

2:12 pm on Feb 5, 2008 (gmt 0)

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To me it looks like the deal will go through...although M$ will pay a big premium to get hold of Yahoo. The cost of integration will be massive and probably take several years in total.

In the meantime what will Google do? Buy Ask? Buy Ebay? Buy a shopping search engine or comparison site?

Who knows but it is going to be interesting :)

2:23 pm on Feb 5, 2008 (gmt 0)

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They have 19B in cash reserves, and just a year ago they had over 40B in cash reserves. They make about $17 billion in profit a year, so I don't see any major issues here. In the worst case, they can issue bonds or choose other alternatives.

Their last report actually shows cash reserves of around $21billion but this is going to be all spent on the yahoo deal. The profit was about $4.5bn last year, you must be thinking of revenue.

This is NOT going to be the end of MSFT, you can come back to this thread in 5yrs time and find it will do the opposite.

It is the end of an era, in the same way that IBM once dominated the PC world. MSFT will not disappear but I guarantee it will be a very different company in 5-10 years.

GOOG is now in deep water, for years MSFT has had their focus in other areas, this BID shows how serious they are now to go after GOOG.

You must be dreaming, even in this 'deep water' the market cap of goog is $155bn. If they have to borrow to buy Yahoo at $40bn then what chance do they have at $155?

2:36 pm on Feb 5, 2008 (gmt 0)

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Personally,

I think Microsoft is simply desperate for other sources of revenue, and profit of course, and they now think that searching and online advertising is the way to go, but I think this is not a good approach.

If you think about it, online advertising just started to pick up after 2002, so it is not even a mature market that can be researched fully, and in regards to search, why do you need google when you have wikepedia where you can go search for something, and find a completely focused article with some good references to visit at the bottom of the article. So, people still have to be educated about the best way to search for focused topics, and when they do learn advertising money will shrink badly, and google will suffer badly.

So, IMHO give it at most 10 years and GOOG market cap will be that of YHOO, and MSFT will then realize, it wasn't such a good deal to purchase YHOO.

2:45 pm on Feb 5, 2008 (gmt 0)

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M$ buying Y! is a scary prospect for G$ - it will put up a serious competitor for their advertising cash cow.

BUT, and this is a big but, the news that M$ will be wiping out their war-chest to do it could have some long term implications in Goog's favour. Goog will still have a war-chest of their own, and the room to manoeuver that goes along with it.

If the buyout goes ahead, this could end up becomming a pyrric victory for Microsoft, especially with a recession looming in the background. Combine this stretch with a sudden downturn in profits as big companies trim their IT spend in a recession, and microsoft will have no choice but to keep further aquisitions out of the picture until things turn around.

Mind, I still think that Y! is in better shape than their stock price would indicate. They're still the biggest web portal out their, and they did make a profit last year. Y! is anything but a company on the ropes. They just might beat off this purchase yet.

Which would still be bad for Microsoft, which would be left with egg on their face in a world where perception means a lot. Ballmer and crew have backed themselves into a corner with this. It should be interesting to see how it plays out.

2:51 pm on Feb 5, 2008 (gmt 0)

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It is the end of an era, in the same way that IBM once dominated the PC world. MSFT will not disappear but I guarantee it will be a very different company in 5-10 years.

so short their stock and a killing. After all you "guarantee it."

Guys, yahoo has some $17 billion in assets that can be sold if MSFT wanted to so no borrowing would happen:

One option being considered by Yahoo is the "monetising" of its stakes in Yahoo Japan and Alibaba.com (1688.HK) in China, said a person close to the situation, according to the report. In a report last month, Jeff Lindsay, a Sanford Bernstein analyst, estimated the value of the assets at $17.6 billion, or $13.24 a share - 55% of Yahoo's market capitalisation at the time, the FT said.

[marketwatch.com...]

Plus, suppose Msft borrows the entire $20 Billion, that is just 1.2 to 1.5 years of profits. Hardly a disaster. It's all relative and they still keep their $20 billion in cash they already have.

2:58 pm on Feb 5, 2008 (gmt 0)

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Microsoft Powered by Yahoo! or Yahoo! Powered by Microsoft?

Don't forget that Microsoft has Vista and Office 2007 products out there. We just spent $17k on Office 2007 alone. I think Microsoft has a lot of money just waiting to come in. They can force it at any time by stopping support of XP / 2003 products :) Would it make us mad? Yep. Could we do anything about it? Nope.

3:09 pm on Feb 5, 2008 (gmt 0)

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Personally, I have strongly mixed emotions on the deal. I hate to see competition decreased in the search space, but I agree that the Microsoft offer is a natural and evolutionary thing for them to do. They need to do it.

However, the offer price seems insanely high to me. Especially if daddy warbucks has to go with hands out to banks to make the deal work. Lets be honest, Yahoo's market share in search is going to continue to erode. They have thrown up little in the last year that will stop or even slow down the Google steam roller. How can Microsoft make $44b possibly work? That seems soo high - too high for a falling giant.

3:11 pm on Feb 5, 2008 (gmt 0)

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Guys, yahoo has some $17 billion in assets that can be sold if MSFT wanted to so no borrowing would happen

Aren't we talking about financing the purchase of Yahoo? Surely you can't buy a company with its own assets?

Yahoo would be best off selling all their assets before the takeover, maybe to Google. MS has committed to buying Yahoo at any cost so they would probably take it missing a few assets. Add a few unanticipated regulatory costs and Yahoo may be the biggest white elephant ever.

Plus, suppose Msft borrows the entire $20 Billion, that is just 1.2 to 1.5 years of profits. Hardly a disaster. It's all relative and they still keep their $20 billion in cash they already have.

How do you suppose the market would react to 0 profit for 1.5 years? The loan would almost certainly be over 5-10 years or possibly more.

P.S. The current bid for Yahoo is $44.6 billion, not $20 billion - they would have to spend their cash AND borrow to buy it.

3:29 pm on Feb 5, 2008 (gmt 0)

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would Microsoft really spend all that money on the Yahoo brand, and all the good stuff Yahoo contains,

Then proceed to re write everything, c'mon

Microsoft .net tech is so different that they might as well write everything themselves, from scratch

more likely, the 2 would merge technologies slowly, over many years

They'd probably retain the names as well, an make sure that Yahoo's loyal fan base didn't notice any immediate change to their services

Merger benefits to be gained from operational, none tech, behind the scenes stuff,

You know how much it costs to run a fully loaded head office,,,

Microsoft is betting its future on this, an its quite exiting to see a colossus being so bold

3:46 pm on Feb 5, 2008 (gmt 0)

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You know how much it costs to run a fully loaded head office,,,

A billion dollars?

3:58 pm on Feb 5, 2008 (gmt 0)

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well it's all speculation until something else happens. Google's entered the equation as well - so it looks like anything could happen at this point.

Let's see what happens!

4:48 pm on Feb 5, 2008 (gmt 0)

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mikedee,
I hope you are joking. You mean Y! would sell $17 Billion and MSFT would still buy them for the same price? They aren't that stupid you know. As far as borrowing in in the company's name see [slate.com...] . The current shareholders get their money via the debt so they don't care.

Also, about selling assets: When Blackstone bought Equity Office Properties Trust they started selling assets even before actually buying them. IIRC, Equity Office Properties Trust sold them at Blackstone's urging to avoid taxes and the money of course stayed with the company /Blackstone.

Obviously, if MSFT had zero profits it would not be good, but I was merely pointing out that is not a backbreaking load. Given their cash flow and credit rating, the loan would probably be the cheapest one ever and MSFT makes more by investing what it has. (borrow at 6% and make 8% by investing the pile they have for example.)

Also the street can recongize that they made $XX milion but paid the debt. It is not the same as no profit.

$20 billion is the aprox cash portion (50%)

[edited by: walkman at 4:53 pm (utc) on Feb. 5, 2008]

4:51 pm on Feb 5, 2008 (gmt 0)

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This news shocked me initially, but as someone said: two second rate search engines don't make a first rate one so I'd say Google don't have much to worry about. Micro$oft must be really afraid of loosing that "big daddy" on the block image so good luck to them, they're going to need it.
5:25 pm on Feb 5, 2008 (gmt 0)

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So, IMHO give it at most 10 years and GOOG market cap will be that of YHOO, and MSFT will then realize, it wasn't such a good deal to purchase YHOO.

I'm inclined to agree with this one. Most companies start out mergers and acquisitions imagining that synergies will ensure sum of the parts turn out greater than the whole. This is very rarely the case. You can go back in time and check on Time Warner-AOL or Daimler-Chrysler or any of the high profile mergers and confirm this. I know people will say this is a buyout, not a merger. There's really no difference. In the spirit of the deal it is a merger if Microsoft has to issue a large amount of its stock and pay $20 Bn in cash.
5:45 pm on Feb 5, 2008 (gmt 0)

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I hope you are joking. You mean Y! would sell $17 Billion and MSFT would still buy them for the same price?

Yes - I am serious. If I were Yahoo I would be talking to Google about selling search patents and any unnecessary tech they might be interested in. If the tech is not making money then I would burn it, this has already happened with Yahoo Music Service. I doubt there is any of that code left anywhere. Also all internal documentation would either be sold or mysteriously vanish.

The goal for Yahoo is to sell as much as possible to deflect the hostile takeover whilst still leaving them as much as possible to continue business afterwards. Remember this is a hostile takeover.

The scorched-earth defense is a form of risk arbitrage and anti-takeover strategy. When a target firm implements this provision, it will make an effort to make it unattractive to the hostile bidder. For example, a company may agree to liquidate or destroy all valuable assets, also called "crown jewels", or schedule debt repayment to be due immediately following a hostile takeover. In some cases, a scorched-earth defense may develop into an extreme anti-takeover defense called a "suicide pill".

[en.wikipedia.org...]

6:58 pm on Feb 5, 2008 (gmt 0)

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and I have another term for you: Pyhrric victory.
7:32 pm on Feb 5, 2008 (gmt 0)

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I think it's telling that from Y!'s end, since Ballmer announced the hostile takeover intent, the high level talks have essentially been between Yang and Schmidt.

Yang isn't going to go down without a fight. The regulators are going to give Microsoft the full treatment on this, and although that won't stop the deal, it will cost MS a pile of $$ to fight it.

Also, the simple fact that MS is even looking at financing the deal with any debt at all represents a sea change in Redmond's ability to compete through acquisition. MS has never had to finance an acquisition before, so from a corporate culture point of view it's a huge step.

It makes MS look desperate, and I think they are. They see the change coming in the revenue model, and they see the need to shift strategy and focus. The question is whether the Titanic can pull hard to port before the iceberg hits.

8:05 pm on Feb 5, 2008 (gmt 0)

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"It makes MS look desperate, and I think they are."

grelmar, it's not desperation.

It's rather an opportunity!

With Yahoo's properties, Microsoft will own some important patents related to the pay-per-click model. This will undermine Google's business practices.

It will also be an opportunity to expand Windows technologies and undermine the open source model. No more long term usage of MySQL and BSD/Linux in Yahoo's properties.

Microsoft would probably deliver only Windows Media for video and audio content at Yahoo's properties. No more long term usage of Flash.

And the timing is just right:

1. The US economy is in bad shape. This does make some companies desperate, not Microsoft, but Yahoo and Google. [webmasterworld.com...]
[webmasterworld.com...]

2. The US political status quo. Bush and Republicans are still running the show. Things could change next year.

9:53 pm on Feb 5, 2008 (gmt 0)

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Reuters [reuters.com]

Google Apps, a suite of software that competes with Microsoft Office. counts 500,000 organizational customers and adds 2,000 customers a day.

Google is making more inroads into MS's cash cow than MS is making into Google's.

2:49 am on Feb 6, 2008 (gmt 0)

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mikedee: Their last report actually shows cash reserves of around $21billion but this is going to be all spent on the yahoo deal. The profit was about $4.5bn last year, you must be thinking of revenue

That is incorrect, you are reading just one quarter, not their annual earnings. Did you just google something like MSFT profit and then paste that without looking at it carefully? Google made 4B profit last year compared to Microsoft's 17B. FYI, MSFT revenue was $58 billion last year. source -- [finance.yahoo.com...]

3:08 am on Feb 6, 2008 (gmt 0)

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Google Apps, a suite of software that competes with Microsoft Office. counts 500,000 organizational customers and adds 2,000 customers a day.

You must be kidding. 2000 customers a day?, so they get 2000 free downloads a day. Hardly a hit on Microsoft Office which sells thousands per day at hundreds of dollars per copy.

And what is Google apps anyway?
[google.com...]

Gmail, Google Talk, Google Calendar, Google Docs, page Creator..

riigght :)

12:45 pm on Feb 7, 2008 (gmt 0)

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Today Microsoft own the desktop at least in the business world and Google Docs is no competition for Office 2007.

Many home users are not prepared to pay for office when docs can do job for no cost.

The web is changing fast and Google will be developing more sophisticated versions of docs which will gradually lure the business user. This is a very big problem for Microsoft - how to compete without damaging sales of desktop applications.

Who knows maybe Google are developing an operating system to compete with windows?

1:06 pm on Feb 7, 2008 (gmt 0)

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The web is changing fast and Google will be developing more sophisticated versions of docs which will gradually lure the business user. This is a very big problem for Microsoft - how to compete without damaging sales of desktop applications.

I am pretty sure that they are working towards online versions of their office applications...how that would be licenced, I am not sure of yet.

Who knows maybe Google are developing an operating system to compete with windows?

There have been rumours of a Google OS for the last few years. Maybe they will release one? It would be a huge challenge for them, and it could damage their reputation, unless it is at least as good as what Apple serves up.

1:52 pm on Feb 7, 2008 (gmt 0)

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Today Microsoft own the desktop at least in the business world and Google Docs is no competition for Office 2007.
Many home users are not prepared to pay for office when docs can do job for no cost.

The web is changing fast and Google will be developing more sophisticated versions of docs which will gradually lure the business user. This is a very big problem for Microsoft - how to compete without damaging sales of desktop applications.

Who knows maybe Google are developing an operating system to compete with windows?

Personally I've all but dumped Microsoft Office in favour of Google Apps. Sure, Office has a lot more and can do a lot more, but for my needs Google has it covered and "my stuff" is available wherever I happen to be, from the multi-PC environment at home to out and about with my laptop/phone whatever. I can still work effectively.

I started back when Google first started their online spreadsheets and haven' looked back since. Have pretty much converted my partner too and a few others. Online collaboration with docs and spreadsheets really works for us.

The only thing I still use is MS Access as it's a back-end for a few web sites. Who knows, maybe that will change in the near future too.

We've got a lot to thank Microsoft for, but Google's stuff is looking shiny, new and exciting not to mention free.

People will vote with their mouse and wallet.

4:47 pm on Feb 7, 2008 (gmt 0)

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I just hope they change the yahoo search over to the live.com search and not the other way around. :)