Microsoft goes nuclear in Google battle

Microsoft has launched a $45bn bid for Yahoo, as Google betrays uncharacteristic signs of mortality...

Last Updated: 31 Aug 2010

Microsoft said today it would offer $31 a share for rival Yahoo, valuing the former online giant at $45bn. That’s a 62% premium on its closing share price yesterday, which shows you how desperate Microsoft is to claw back some ground on the Google juggernaut in the battle for online advertising dollars. It reckons combining the two companies would save $1bn a year.

Rumours of a merger between the two companies have been going on for some time now. Both have been left eating dust by Google’s irresistible rise, with Yahoo particularly hard-hit: once the undisputed king of the internet, Yahoo has seen its share of the search market fall to a measly 18%. Meanwhile Google has snapped up 56% of the search market, and about 40% of the global online advertising market.

The move could be well-timed – it comes on the very day that Google’s share price took a battering after the search behemoth actually disappointed Wall Street for once. Revenue was up a ‘mere’ 52% last quarter, 3% lower than expected, while profits were up ‘only’ 17%. Hardly the end of the world as we know it – but Wall Street has become so used to seeing Google shoot the lights out that anything less than extraordinary results come as a bit of a disappointment. The idea that Google might be just as vulnerable to the US economic slowdown as everyone else – in other words, that it could be mortal after all – is enough to have analysts reaching for the Prozac.

And investors are certainly worried: Google’s share price fell nearly 7% in after-hours trading yesterday, meaning that it has now lost nearly a quarter of its value since November. That means Larry and Sergei’s company is worth $55bn less than it was three months ago.

What’s more, Google’s top brass admitted yesterday that it’s struggling to make money from advertising on social networking sites. Apparently boss Sergei Brin told reporters. ‘I don't think we have the killer best way to advertise on social networks. Some of the things that we were working on in Q4 didn't really pan out.’ In other words, it’s not getting the click-throughs it was expecting – and since it has to pay the likes of MySpace to carry adverts in the first place, it’s been left out of pocket. It may be steaming ahead elsewhere (Google Docs, Maps, TV, social networking platform OpenSocial and mobile phone system Android are all going great guns) but advertising is its major cash cow, so the company’s earnings would be vulnerable to a big downturn in the ad market.

Now it looks as though its competitors are going to gang up against it. Still, the reason Google is valued at nearly 30 times its annual profits is because it’s consistently grown revenues and profits faster than everyone else (as it did last quarter, in fact). So we wouldn’t bet against it just yet...

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