Google-wary Gates wants Yahoo for $44 billion

If consummated, the deal would re-draw the competitive landscape in Internet consumer services, where both Microsoft and Yahoo have struggled to compete with Google. The offer of $31 a share represents a 62 per cent premium over Yahoo’s closing stock price of $19.18 on Thursday. It would be Microsoft’s largest acquisition ever.

Microsoft said the combination of the two companies would create efficiencies that would save approximately $1 billion annually. The software giant also said that it has an integration plan to include employees of both companies and intends to offer incentives to retain Yahoo employees.

Steven A Ballmer, the Microsoft chief executive, said that he called his Yahoo counterpart, Jerry Yang, on Thursday night to tell him that Microsoft intended to bid on the company, and that they had a substantive discussion. “I wouldn’t call it a courtesy call,” he said in an interview.

Ballmer said he had decided to pursue a takeover because friendly deal negotiations would most likely be protracted and would probably become public. “These things are hard to keep quiet in the best of times,” he said. He said his conversation with Yang was constructive, but suggested that a deal may not come easily.

Yahoo said in a news release on Friday that its board would evaluate Microsoft’s bid “carefully and promptly in the context of Yahoo’s strategic plans.”

In a letter to Yahoo’s board, Ballmer wrote that the two companies discussed a possible merger, as well as other ways to work together, in late 2006 and 2007. Ballmer said that in February 2007, Yahoo decided to end the merger discussions because its board was confident in the company’s “potential upside.”

“A year has gone by, and the competitive situation has not improved,” Ballmer wrote. As a result, he said, “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.”

Ballmer met several times in late 2006 and 2007 with Terry S Semel, then Yahoo’s chief executive, people involved in the talks said. While the talks — originally focused on the prospect of a merger or a joint venture — were initially constructive and appeared to move forward, they quickly broke down, these people said.

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