Microsoft Bids $31 for Yahoo (MSFT/YHOO)

NEW: What Microsoft's financials will look like after the deal.

NEW: A Microsoft insider on plans for brand, integration, Yahoo's reaction, and competitive bids.

NEW: Will other bidders emerge? Will Microsoft be forced to raise its offer? Our answers: "No" and No."

NEW: Analysis of conference call. Steve Ballmer relayed the offer to Jerry Yang last night. Steve did not give any sense of Jerry's reaction. (We assume it was not, "Great! Look forward to working with you!"). We still think this is an offer Yahoo can't refuse. We don't Microsoft will be forced to pay more.

At 6:30am EST, Microsoft offered to buy Yahoo for $44.6 billion in cash and stock, or $31 per share. This is a 62 percent premium to Yahoo's closing stock price Thursday. The offer is half cash / half stock, with each Yahoo shareholder choosing which consideration they want to receive.

This is a brilliant move by Microsoft--a big premium dangled in front of battered Yahoo shareholders, but a price that would have seemed absurdly low as recently as six months ago.
 

• Given Yahoo's battered stock and low 2008 outlook, we expect the offer will be accepted.
• Yahoo (YHOO) trading at $29.70 in pre-market, implying high likelihood of success.
  
• We do not see any regulatory issues: The combined entity (online division) will only be 2/3 the size of Google. Microsoft overall will be far larger than Google, but Microsoft will argue, persuasively, that they're mostly in two different businesses. Google will snicker at this internally, but not protest publicly.
  

Microsoft has made numerous overtures to Yahoo over the years, this being by far the most aggressive. By going public with the offer, Microsoft is seeking to "pull a Murdoch"--going over the heads of Yahoo's management team straight to independent shareholders, in the hopes that the shareholders will force management to sell. This is the same play Murdoch used so brilliantly to swipe Dow Jones from the Bancroft family.

The deal also makes sense strategically: Yahoo and Microsoft need to combine forces to compete against Google. Alas, we continue to think that, if Yahoo is simply swallowed into Microsoft, this will be the end of a once-great brand and franchise. But after the events of the past two years, perhaps that franchise is already close to being history.

Microsoft expects the deal to yield $1 billion in cost synergies. Microsoft's Internet division is losing about $1 billion a year, so this suggests the combined entity would be profitable (thank goodness--and a rarity for Microsoft).

Microsoft is holding a call at 8:30 EST, 5:30 PST to discuss the offer.

Complete Coverage: Microsoft's Bid For Yahoo!

LIVE COVERAGE: Microsoft Conference Call
Micro-Hoo: Combined Financial Performance (including cost synergies)
Conference Call information
Microsoft Letter to Yahoo Board

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