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FINANCIALS

Microsoft Corporation (MSFT) Might Just Buy Out Yahoo Inc.’s (YHOO) Search

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Recent reports suggest there is a high chance the Windows maker might contribute heavily toward a Yahoo Search buyout

As Yahoo! Inc. (NASDAQ:YHOO) plans to divest its core Search business, Microsoft Corporation (NASDAQ:MSFT) has yet another unique opportunity to make an investment. According to Re/code, Microsoft employees have held several meetings with private equity firms to consider the idea of backing bids for the company’s core Search business.

Even though Microsoft has not made any commitment to do so, if it follows the idea, the company would benefit from close partnerships with new Yahoo search owners. Such a partnership might ultimately enable Microsoft to make an outright bid to acquire the business, as it might prove to be a valuable investment.

Microsoft’s interest in Yahoo led it to make a hostile takeover bid back in 2008 when the company was worth $45 billion. After that deal failed, Microsoft went for a cooperative framework to work with Yahoo’s platform. However, after Yahoo CEO Marissa Mayer took charge in 2012, the company shifted focus toward mobile and contextual search, both of which were not exclusive to the Microsoft deal. Ms. Mayer also negotiated with Microsoft and led the company to reduce its Yahoo Search share to 51%, eliminating Microsoft’s non-Bing search revenue and increasing Yahoo’s Bing search revenue share from 88% to 93%.

Since then, Yahoo has been in trouble. Its market cap now stands at $33 billion, most of which comprises of its stake in Alibaba Group Holding Ltd. (NYSE:BABA) and the core Search business valued somewhere between $6-8 billion. The main problem for the company was growing traffic acquisition costs, as they rose from $217.5 million to $877.5 million only within 2015, marking a dangerous trajectory for Yahoo. The company had posted an operating profit of $142.9 million in 2014.

Yahoo is asking for $10 billion for its core business. Microsoft’s investment in Yahoo would mean that in the future the Windows maker would be able to leverage Yahoo’s media and search platform for its own Bing Search, increasing its global footprint against search giant Google Inc. This investment would also help it integrate Yahoo Search with Azure, its cloud computing platform.

Microsoft might not have much of an issue shelling out a few billion dollars to back such a bid or even for an outright buyout. However, Yahoo appears to be asking more for its search business than it is worth right now. In case the Windows maker makes an attractive offer less than $10 billion, Yahoo might not find itself in a position to negotiate.

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