Microsoft resolves to fight Google

Its weapon of choice: Yahoo

SAN FRANCISCO -- Jerry Yang, the chief executive of Yahoo, was finishing a regularly scheduled company board meeting Thursday night when his assistant interrupted him with an urgent phone call.

It was Steven A. Ballmer, the chief executive of Microsoft, and his message was curt. He didn't call to negotiate. Microsoft would make public a hostile $44.6 billion offer for Yahoo early Friday morning in a bold move to counter Google's online pre-eminence.

Yang, in shock, rushed back with the news to his directors, some of whom were getting ready to leave Yahoo's headquarters in Sunnyvale, Calif. The board meeting was no longer over; it would turn into a strategy session that stretched into the night.

The message that jolted Yang also jolted the technology industry. Founded by two Stanford graduate students, Yang and David Filo, Yahoo was once the leader of the dot-com world. But it has been dethroned in recent years by Google, itself founded by two Stanford grad students. For its part, Microsoft has struggled to compete with Google's ever-widening lead in search and advertising as the computer world shifts from desktop products to online software and services supported by advertising.

Each company has persistently tried to best Google but failed. "No one can compete with Google on their own anymore," said Jon Miller, the former chairman and chief executive of AOL, which is also struggling to compete against Google. "There has to be consolidation among the major players. It has been a long time coming, and now it is here."

If consummated, the deal would instantly redraw the competitive landscape on the Internet. And it would escalate the battle between Microsoft and Google, already the most intense high-stakes battle in the technology world, over who will dominate the booming online advertising business.

Yahoo has spent billions of dollars in recent years to develop better search and advertising technology, and initiated a clumsy effort to create Hollywood-style entertainment on the Web. But Yahoo's growth has lagged, prompting Yang, who was appointed chief executive last summer amid growing shareholder dissatisfaction, to announce this week major layoffs -- 1,000 of its 14,300 workers. He also warned investors that a turnaround was not likely to come until 2009.

For Microsoft, the bid underscores both the company's urgency and its determination to succeed online.

The combination of Yahoo and Microsoft would create a more powerful counterweight to Google. Some advantages:

* Yahoo's audience, already the largest on the Internet, would be bolstered by the tens of millions of users of Microsoft's services, creating a much larger online display advertising business.

* In Internet search, the market share of the two companies would exceed 30 percent of the American market, according to Bloomberg News. That would still be far below Google's 56 percent share but would help the companies attract more advertisers and higher prices for ads.

* Microsoft executives said the merger would provide it with more engineering talent and technology infrastructure, and would result in annual savings of $1 billion.

* The combination will also bring Microsoft relationships with a long list of publishers and advertisers, bolstering the company's quest to become a leading seller of ads not only on its site but on sites across the Web. Microsoft, which paid $6 billion last year for online advertising specialist aQuantive, already sells ads on popular sites such as Facebook and Digg, as Yahoo does on eBay, Comcast and the sites of hundreds of newspapers. Google, for its part, beat out Microsoft for deals with MySpace, AOL and others.

"For Microsoft it is essential, and probably way overdue," said Bob Davis, the former chief executive of Internet portal Lycos, and now a venture capitalist. "With Yahoo, they get a critical mass of advertisers and publishers overnight, and they get know-how that otherwise they wouldn't have."