Sunday, February 10, 2008

Microsoft and Yahoo! Merger

Microsoft is trying to buy Yahoo! at a price of $31/share. Barrons analyzed this deal and said the price Microsoft is paying is low when compared to the Acquantive acquisition. Henry Blodget, the former internet analyst has this to say about this deal in his blog.

"The first problem with Microsoft's online services division is the name: Microsoft's online services division. MSN, Windows Live, Office Live,, aQuantive...we'd feel better about the company's chances if it could begin by settling on a brand (or at least a couple of brands).As for last quarter...Online revenue jumped 38% to $863 million, for an overall annual run-rate of a respectable $3.4 billion. Of that, $623 million was advertising ($2.5 billion run rate), making Microsoft's ad business one-seventh of Google's size and about one-third of Yahoo's size.Of the advertising business, which also grew 38% year over year, $112 million came from the aQuantive acquisition. Excluding this, the division's ad revenue grew 24% vs. 25% last quarter. This means Microsoft almost certainly lost more share to Google in the quarter, but may have picked up a small amount against Yahoo.Most importantly, despite the acquisition of profitable aQuantive, Microsoft's online business is still burning money--$800 million a year (after factoring out some non-cash charges). This is an improvement vs. Q207, when it was losing $1 billion a year, but it's still horrible. Even walloped AOL is still printing money. Microsoft's online successes, such as they are, won't be taken seriously until the company is running a large, organically growing, profitable business."

Let us look at the latest numbers from Q2 of 2008. The numbers thus far in 08 is 1.5 billion in revenue with 500 million dollar loss. Yahoo! on the other hand had revenues of ~7 billion with approximate profit of 660 million. Combining the two entities by themselves would result in about 10 billion in revenue with about 340 million in loss. This is without adding any cost saving, talent loss and special incentive packages to retain executives and employees. If one billion is cut from costs it will result in about 600 million in profits. This is not including the increase in cost structure to retain key employees and managers.

This compares to 16 billion in revenues and 4 billion in net income at Google. As can be seen, from the business stand point, Google is ahead and continues to pull ahead as Microhoo! gets bogged down in getting the merger to work.

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