Microsoft Partners with Yahoo!-An Alternative to Takeover

question 25

Essay

Microsoft Partners with Yahoo!-An Alternative to Takeover?
Business alliances sometimes represent a less expensive alternative to mergers and acquisitions. This notion may have motivated Microsoft when the firm first approached Yahoo! about a potential partnership in November 2006 and again in mid-2007. Frustrated with their inability to partner with Yahoo!, Microsoft initiated a hostile takeover bid in 2008 valued at almost $48 billion or $33 per share, only to be spurned by Yahoo!. Following the withdrawal of Microsoft's offer, Yahoo!'s share price fell into the low to mid-teens and remained in that range throughout 2010.
Reflecting the slumping share price and a failed effort to create a search partnership with Google, Yahoo!'s cofounder, Jerry Yang, was replaced by Carol Bartz in early 2009. The U.S. Justice Department had threatened to sue to block the proposed partnership between Yahoo! and Google on antitrust grounds.
Microsoft again approached Yahoo! with a partnering proposal in mid-2009, which resulted in an announcement on February 18, 2010, of an Internet search agreement between the two firms. As a result of the agreement, Yahoo! transferred control of its Internet search technology to Microsoft. Microsoft is relying on a ten-year arrangement with Yahoo! to help counter the dominance of Google in the Internet search market. By gaining access to each other's Internet users, both firms hope to be able to attract more advertising dollars from companies willing to pay for links on Microsoft's and Yahoo!'s websites. With Microsoft's search technology believed to be superior to Yahoo!'s, users requesting searches through Yahoo!'s site will be implemented using Microsoft's search software.
Regulatory agencies in both the United States and the European Union had no trouble approving the proposal because the combined Yahoo! and Microsoft Internet search market share is dwarfed by Google's. Google is estimated to have about two-thirds of the search market, followed by Yahoo! at 7% and Microsoft with about 3%.
Yahoo! could profit handsomely from the deal, since it will retain 88% of the revenue from search ads on its website during the first five years of the ten-year contract. Microsoft will pay for most of the costs of implementing the partnership by giving Yahoo! $150 million to defray its expenses. Microsoft also agreed to absorb about 400 of Yahoo!'s nearly 14,000 employees. Ironically, Microsoft may get much of what it wanted (namely Yahoo!'s user base) at a fraction of the cost it would have paid to acquire the entire company.
Garmin Utilizes Supply Agreement as Alternative to Acquiring Tele Atlas
Following an aggressive bidding process, Garmin Ltd., the largest U.S. maker of car-navigation devices, withdrew its bid for the Netherlands-based Tele Atlas NV on November 16, 2007. Tele Atlas provides maps of 12 million miles of roads in 200 countries. The move cleared the way for TomTom NV to buy the mapmaker for $4.25 billion. Both Garmin and TomTom are leading manufacturers of global positioning systems (GPSs), which enable users to navigate more easily through unfamiliar territory. The most critical component of such navigation systems is the map.
In lieu of acquiring Tele Atlas, Garmin entered into a six-year deal with an option to extend for an additional four years to obtain maps from Tele Atlas's competitor Navteq Corp. In doing so, Garmin avoided the EPS-dilutive effects of owning money-losing Tele Atlas. Garmin can focus on building traffic information and business listings into its products without having to own the underlying maps. An acquisition would have diluted Garmin's profit until 2010. Building maps comparable to those owned by Tele Atlas could take up to 10 years and cost $1 billion.
By owning the maps, TomTom is seeking to become more of a service provider than simply a manufacturer of GPS devices. Such devices are widely used in the automotive industry, as well as aviation and boating. The biggest growth opportunity is the increased use of GPS tracking capabilities in the market for mobile phones. This application is expected to dwarf the transportation and sports markets for GPS devices.
Because it will own the underlying maps, TomTom may be able to more easily combine the data with navigation devices and add traffic, gas station, and restaurant information. In contrast, Garmin will have to obtain proprietary data from others. Garmin may also have to pay more for maps or even lose access after the contract (including the option to extend) expires.
-Describe the advantages of the supply agreement to Garmin compared to outright acquisition of Tele Atlas?

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Definitions:

Secondary

Generally refers to the second in order, importance, or stage, often used in different contexts such as education or stages of a process.

Fixed-interval Schedule

A reinforcement schedule in which a reward is offered after a set period of time has passed, assuming a correct response is made.

Reinforcement

In behavioral psychology, a process by which a behavior is strengthened or increased through positive outcomes or consequences following the behavior.

Fixed Amount

A predetermined quantity, often referring to a specific sum of money or a static measurement in experiments and statistics.