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More developments in the Microsoft/Yahoo will they or won’t they story: MSFT is proposing to buy YHOO shares at $31 per share, for a total equity value of over $44.5 billion. A combined Microsoft-Yahoo force might actually have the muscle to at least play in the same league as Google. (I’m so annoyed that I had already sold my Yahoo stock!) However, as SEO Hack points out, in a sentiment shared by many, that partnership would be like a giant retarded gorilla sitting on a flattened baby chicken.

Here’s the text of the press release:

REDMOND, Wash., Feb. 1, 2008 — Microsoft Corp.
(Nasdaq: MSFT) today announced that it has made a proposal to the Yahoo!
Inc. (Nasdaq: YHOO) Board of Directors to acquire all the outstanding
shares of Yahoo! common stock for per share consideration of $31
representing a total equity value of approximately $44.6 billion.
Microsoft’s proposal would allow the Yahoo! shareholders to elect to
receive cash or a fixed number of shares of Microsoft common stock, with
the total consideration payable to Yahoo! shareholders consisting of
one-half cash and one-half Microsoft common stock. The offer represents a
62 percent premium above the closing price of Yahoo! common stock on Jan.
31, 2008.

“We have great respect for Yahoo!, and together we can offer an
increasingly exciting set of solutions for consumers, publishers and
advertisers while becoming better positioned to compete in the online
services market,” said Steve Ballmer, chief executive officer of Microsoft.
“We believe our combination will deliver superior value to our respective
shareholders and better choice and innovation to our customers and industry
partners.”

“Our lives, our businesses, and even our society have been
progressively transformed by the Web, and Yahoo! has played a pioneering
role by building compelling, high-scale services and infrastructure,” said
Ray Ozzie, chief software architect at Microsoft. “The combination of these
two great teams would enable us to jointly deliver a broad range of new
experiences to our customers that neither of us would have achieved on our
own.”

The online advertising market is growing at a very fast pace, from over
$40 billion in 2007 to nearly $80 billion by 2010. The resulting benefits
of scale along with the associated capital costs for advertising platform
providers make this a time of industry consolidation and convergence. Today
this market is increasingly dominated by one player. Together, Microsoft
and Yahoo! can offer a competitive choice while better fulfilling the needs
of customers and partners.

“The combined assets and strong services focus of these two companies
will enable us to achieve scale economics while reaching R&D critical mass
to deliver innovation breakthroughs,” said Kevin Johnson, president of the
Platforms & Services Division of Microsoft. “The industry will be well
served by having more than one strong player, offering more value and real
choice to advertisers, publishers and consumers.”

The combination will create a more efficient company with synergies in
four areas: scale economics driven by audience critical mass and increased
value for advertisers; combined engineering talent to accelerate
innovation; operational efficiencies through elimination of redundant cost;
and the ability to innovate in emerging user experiences such as video and
mobile. Microsoft believes these four areas will generate at least $1
billion in annual synergy for the combined entity.

Microsoft has developed a plan and process that will include the
employees of both companies to focus on the integration of the combined
business. Microsoft intends to offer significant retention packages to
Yahoo! engineers, key leaders and employees across all disciplines.

Microsoft believes this proposed combination would receive all
necessary regulatory approvals and expects that the proposed transaction
would be completed in the second half of calendar year 2008.

Microsoft is also committed to working closely with Yahoo! management
and its Board of Directors as they, along with Yahoo! shareholders,
evaluate this compelling proposal.

Below is the text of the letter that Microsoft sent to Yahoo!’s Board of
Directors:

January 31, 2008

Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089
Attention: Roy Bostock, Chairman
Attention: Jerry Yang, Chief Executive Officer

Dear Members of the Board:
I am writing on behalf of the Board of Directors of Microsoft to make a
proposal for a business combination of Microsoft and Yahoo!. Under our
proposal, Microsoft would acquire all of the outstanding shares of Yahoo!
common stock for per share consideration of $31 based on Microsoft’s
closing share price on January 31, 2008, payable in the form of $31 in cash
or 0.9509 of a share of Microsoft common stock. Microsoft would provide
each Yahoo! shareholder with the ability to choose whether to receive the
consideration in cash or Microsoft common stock, subject to pro-ration so
that in the aggregate one-half of the Yahoo! common shares will be
exchanged for shares of Microsoft common stock and one-half of the Yahoo!
common shares will be converted into the right to receive cash. Our
proposal is not subject to any financing condition.

Our proposal represents a 62% premium above the closing price of Yahoo!
common stock of $19.18 on January 31, 2008. The implied premium for the
operating assets of the company clearly is considerably greater when
adjusted for the minority, non-controlled assets and cash. By whatever
financial measure you use - EBITDA, free cash flow, operating cash flow,
net income, or analyst target prices - this proposal represents a
compelling value realization event for your shareholders.

We believe that Microsoft common stock represents a very attractive
investment opportunity for Yahoo!’s shareholders. Microsoft has generated
revenue growth of 15%, earnings growth of 26%, and a return on equity of
35% on average for the last three years. Microsoft’s share price has
generated shareholder returns of 8% during the last one year period and 28%
during the last three year period, significantly outperforming the S&P 500.
It is our view that Microsoft has significant potential upside given the
continued solid growth in our core businesses, the recent launch of Windows
Vista, and other strategic initiatives.

Microsoft’s consistent belief has been that the combination of
Microsoft and Yahoo! clearly represents the best way to deliver maximum
value to our respective shareholders, as well as create a more efficient
and competitive company that would provide greater value and service to our
customers. In late 2006 and early 2007, we jointly explored a broad range
of ways in which our two companies might work together. These discussions
were based on a vision that the online businesses of Microsoft and Yahoo!
should be aligned in some way to create a more effective competitor in the
online marketplace. We discussed a number of alternatives ranging from
commercial partnerships to a merger proposal, which you rejected. 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.

In February 2007, I received a letter from your Chairman indicating the
view of the Yahoo! Board that “now is not the right time from the
perspective of our shareholders to enter into discussions regarding an
acquisition transaction.” According to that letter, the principal reason
for this view was the Yahoo! Board’s confidence in the “potential upside”
if management successfully executed on a reformulated strategy based on
certain operational initiatives, such as Project Panama, and a significant
organizational realignment. A year has gone by, and the competitive
situation has not improved.

While online advertising growth continues, there are significant
benefits of scale in advertising platform economics, in capital costs for
search index build-out, and in research and development, making this a time
of industry consolidation and convergence. Today, the market is
increasingly dominated by one player who is consolidating its dominance
through acquisition. Together, Microsoft and Yahoo! can offer a credible
alternative for consumers, advertisers, and publishers. Synergies of this
combination fall into four areas:

— Scale economics: This combination enables synergies related to scale
economics of the advertising platform where today there is only one
competitor at scale. This includes synergies across both search and
non-search related advertising that will strengthen the value
proposition to both advertisers and publishers. Additionally, the
combination allows us to consolidate capital spending.
— Expanded R&D capacity: The combined talent of our engineering
resources can be focused on R&D priorities such as a single search
index and single advertising platform. Together we can unleash new
levels of innovation, delivering enhanced user experiences,
breakthroughs in search, and new advertising platform capabilities.
Many of these breakthroughs are a function of an engineering scale that
today neither of our companies has on its own.
— Operational efficiencies: Eliminating redundant infrastructure and
duplicative operating costs will improve the financial performance of
the combined entity.
— Emerging user experiences: Our combined ability to focus engineering
resources that drive innovation in emerging scenarios such as video,
mobile services, online commerce, social media, and social platforms is
greatly enhanced.
We would value the opportunity to further discuss with you how to
optimize the integration of our respective businesses to create a leading
global technology company with exceptional display and search advertising
capabilities. You should also be aware that we intend to offer significant
retention packages to your engineers, key leaders and employees across all
disciplines.

We have dedicated considerable time and resources to an analysis of a
potential transaction and are confident that the combination will receive
all necessary regulatory approvals. We look forward to discussing this with
you, and both our internal legal team and outside counsel are available to
meet with your counsel at their earliest convenience.

Our proposal is subject to the negotiation of a definitive merger
agreement and our having the opportunity to conduct certain limited and
confirmatory due diligence. In addition, because a portion of the aggregate
merger consideration would consist of Microsoft common stock, we would
provide Yahoo! the opportunity to conduct appropriate limited due diligence
with respect to Microsoft. We are prepared to deliver a draft merger
agreement to you and begin discussions immediately.

In light of the significance of this proposal to your shareholders and
ours, as well as the potential for selective disclosures, our intention is
to publicly release the text of this letter tomorrow morning.

Due to the importance of these discussions and the value represented by
our proposal, we expect the Yahoo! Board to engage in a full review of our
proposal. My leadership team and I would be happy to make ourselves
available to meet with you and your Board at your earliest convenience.
Depending on the nature of your response, Microsoft reserves the right to
pursue all necessary steps to ensure that Yahoo!’s shareholders are
provided with the opportunity to realize the value inherent in our
proposal.

We believe this proposal represents a unique opportunity to create
significant value for Yahoo!’s shareholders and employees, and the combined
company will be better positioned to provide an enhanced value proposition
to users and advertisers. We hope that you and your Board share our
enthusiasm, and we look forward to a prompt and favorable reply.

Sincerely yours,

/s/ Steven A. Ballmer
Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

This week’s weather, according to the Yahoo Search blog. Check to see if a rankings shift is in your forecast.

According to the Yahoo Search Blog, Yahoo rolled out an update to their search index and ranking algorithm over the weekend. Time to go check the rankings.

Nielsen//NetRatings today reported its market share data for the top 10 search engines. Google, no surprise, continues to lead with Nielsen NetRatings reporting 4.03 billion searches having been conducted on Google last month. That translates to nearly 45% year over year growth and 56.3% of total U.S. market share.

Yahoo Search is in second place with a little over 1.5 billion searches and 21.5% of the total. MSN trails a distant third with only 8.4% of all U.S. searches conducted on the Windows Live search engine. Rounding out the top 5 search engines are AOL Search and Ask.com, with 5.3% and 2.5% of search market share, respectively.

At the bottom of the list is the search aggregator Dogpile, which saw fewer net searches than the previous year, with year over year growth a -10.6%.

HitWise, a competing market research firm, also released its May search data today. According to HitWise, in May Google captured a whopping 65.1% of all U.S. searches, up from 59.3% last year. The number of searches attributed by HitWise to Yahoo are in line with Nielsen’s data: 20.9%, a figure that’s down slightly from May 2006. And MSN/Live Search garnered 8.4% of searches, down from 12.1% of marketshare 12 months prior.

Ask.com fared a little better based on HitWise data, with 3.9% of the market compared to 2.5% that Nielsen reported. Either way, IAC’s Ask.com continues to lose market share to the bigger players.

Tim Mayer of Yahoo told Search Engine Land to “expect minor changes” in Yahoo’s organic listings over the next few days. Things should settle into place by Friday, according to Mayer.

ComScore recently released its January figures for search engine market share among U.S. Internet users.

According to comScore’s research, Google captured 47.5% of the U.S. search market, gaining 0.2 points from the previous month. Yahoo maintained its second place ranking with 28.1% of U.S. searches, but lost 0.4% from the previous month. With a slight gain, Microsoft search was used for 10.6% of U.S. searches. Ask Network and AOL Time Warner claimed about half that with 5.2% and 5.0% respectively.

According to just-released data from Compete, Google continues to gain search market share at everyone else’s expense (yawn, what else is new), everyone but AOL that is. Now there’s a twist. Is AOL the little search engine that could? Well, no. While it’s market share might not have declined last month, it’s still in a distant fourth place, with no hope of catching up, unless something dramatic happens in the search landscape. And then there’s the issue of AOL not using proprietary search technology.

ComScore released its own market share findings this week as well. According to comScore’s press release,

In December 2006, Google Sites captured 47.3 percent of the U.S. search market, gaining 0.4 share points from the previous month. Yahoo! Sites grew 0.3 share points, maintaining its second place ranking with 28.5 percent of U.S. searches, followed by Microsoft Sites (10.5 percent), Ask Network (5.4 percent) and Time Warner Network (4.9 percent).

ComScore further says, “Americans conducted 6.7 billion searches online in December, up 1 percent versus November. Annual growth rates in search query volume remained strong with a 30-percent increase since the same month a year ago.”

More info on these data at Danny Sullivan’s Search Engine Land.

iMedia Connection explains what those Microsoft-acquiring-part-of-Yahoo rumors were about:

Yahoo CEO Terry Semel told the Financial Times that his company declined Microsoft’s attempt to buy a stake in Yahoo.

The discussions between Yahoo and Microsoft took place during Microsoft’s use of Yahoo’s search technology, reported the Financial Times. Microsoft switched to Google Inc. as its search technology partner from Yahoo.
…
Semel told the paper that although Yahoo talked with Microsoft co-owning some of their search, the final decision was not to sell.

“I will not sell a piece of search– it is like selling your right arm while keeping your left; it does not make any sense,” Semel said at an event at Syracuse University.

Darn, that would have made things really interesting. On the other hand, Microsoft would have crushed the life and soul out of innovation (Resistance. Is. Futile.) and Yahoo is doing some pretty interesting things with social media (and doing them better) than Google.

Microsoft and Yahoo have been holding clandestine talks about teaming up to challenge Google, according to a leaked memo. Despite launching and then relaunching and then half-launching/renaming their search engine, and many months worth of saber rattling, is Microsoft conceding defeat, admitting that it has no hope of beating Google in the search game by itself?

The WSJ reports, that there are two factions within Microsoft — those who think Microsoft should build their search empire themselves, and those who think it makes more sense to buy something. And who better than Yahoo (certainly the AOL thing wouldn’t have done the trick) — Yahoo is the #2 search company, with lots of traffic and a search engine that actually presents decent results.

Search Engine Watch’s Danny Sullivan says:

The Wall Street Journal cites the hiring of Steve Berkowitz by Microsoft as perhaps being a tipping point. I’d certainly agree. Steve is the first serious outside person Microsoft has brought in for its battle in the search wars. Bringing him on was a big sign that what Microsoft has been trying to do internally hasn’t been working — and so something radical such as an Ask or Yahoo acquisition might be in order.

According to WebProNews, “Yahoo has its improved search advertising relevance algorithms in testing with ‘Project Panama.’ Sometime soon, Yahoo may bring Panama in from the cold of Scandinavia, and test it in the United Kingdom this summer.” And Microsoft has been putting its energies into paid search to rival Yahoo/Overture and Google.

“Ballmer told Microsoft’s employees that the company would make ‘heavy investments’ in Internet search. “[O]ur goal is to create the Web’s largest advertising network, giving us an engine that will enable us to monetize our services and compete against Google,’ Ballmer wrote.”

So all that bravado from Gates about taking down Google, then, appears to have been borne not out of confidence in its technology innovations, but rather possible aquisitions. Or so it looks to me.

comScore’s latest release shows that the number of search queries rose and, once again, Google not only leads the pack but takes market share from its competitors.

Other highlights:

• Americans conducted 6.4 billion searches online in March, up 10% from last month and 15% from last year. The increase in search queries from the previous month marked the largest gain over the past 12 months.
• Google Sites led the pack with 2.7 billion search queries performed, followed by Yahoo Sites (1.8 billion), MSN-Microsoft (849 million), Time-Warner Network (486 million), and Ask Jeeves/Ask Network (376 million).
• The toolbar search market continues to be dominated by Google and Yahoo, which combined for more than 95% of toolbar searches in March. Google led the way with 48.9%, while Yahoo captured 46.5%.