Source: http://www.marketwatch.com/news/story/microsoft-sets-record-yahoo-bid/story.aspx?guid=%7B98AC3C41%2D7631%2D4538%2DACB8%2D3F908ECA9D22%7D&siteid=yhoof

SAN FRANCISCO (MarketWatch) -- Microsoft Corp. has broken the record books with its unsolicited takeover bid for Yahoo Inc., which will be an expensive deal even for the titan of the software industry to close.

On Friday, Microsoft announced that it has bid $31 a share to acquire Yahoo, representing a 62% premium over the latter's recent market value. The move is meant to challenge the supremacy of Google Inc. in the fast-growing market for online advertising.

The value of the offer -- $44.6 billion in cash and stock -- makes it the largest bid on record in the high-tech sector, according to data from Thomson Financial.

It also makes it a very expensive deal, even for a company the size of Microsoft.

As of Dec. 31, the software giant reported cash and short-term investments that totaled just over $21 billion. Microsoft said it will cap the cash payout of the Yahoo buy to half the deal's total value -- which is roughly on par with the company's existing cash base.

Walter Pritchard of Cowen & Co. expects Microsoft to be in the unfamiliar position of having to use some "modest debt" to close the deal in order to keep its cash reserves at a minimum of $3 billion.

"We have no worries about Microsoft's ability to raise debt even in tougher credit times given strong cash flow," he wrote in a note to clients.

That said, Pritchard says he is "negatively biased" toward the deal, as he believes the Yahoo business is in decline and won't bring "significant momentum" to Microsoft's online business.

Pritchard also noted the risks of integrating such a massive merger. The proposed Microsoft-Yahoo deal is about twice the size of the last mammoth business combination in the tech sector -- Hewlett-Packard's $23 billion acquisition of Compaq Computer Corp. in 2001, which turned into an integration nightmare and eventually played a factor in the ouster of H-P's then chief executive Carly Fiorina.

Microsoft has already committed some serious money to the online ad space. The company paid about $6 billion last year to buy digital marketing company aQuantive.

Noting that deal, a Citigroup analysis observed that -- in buying Yahoo -- Microsoft will have spent about twice its cash reserves to boost its "software plus services strategy."

"While a considerable amount of money, the deal makes strategic sense for Microsoft as it has failed to adequately monetize its brand on the Internet," the Citigroup report read. "The online advertising business has scale economics, and the addition of Yahoo would help accelerate the path to profitability for its online services division that has lost $1.25 billion in the last six quarters."

The Microsoft-Yahoo deal surpasses the previous high-tech record holder -- the acquisition of SDL Inc. by JDS Uniphase in 2001, which was an all-stock deal valued at just under $41 billion. Last year's buyout of First Data Corp. by private equity firm Kohlberg Kravis was valued at just over $27 billion.

Dan Gallagher is MarketWatch's technology editor, based in San Francisco.

cash is not a problem for microsoft, debt or no debt. $3 billion is less than one quarter's earnings for MSFT.

the question is whether they're paying too much for yahoo.

This deal for some reason reminds me of AOL Time Warner... I hope it doesn't happen and that Microsoft gets rid of Ballmer.

It's certainly not a problem, but it does put this deal into perspective. Microsoft has had piles of cash for a long time, if they change to a situation where they're in debt, that's a quite dramatic change in the short/medium term!

They used to have $60 billion in cash, but then paid out most of it to shareholders. Then they had about $20 billion. After this deal (if it happens), they may have a $3 billion debt. That's quite a shift I'd say.

Its some pretty crappy timing if the U.S. goes into Recession... Upgrading a PC to use Vista would be the last thing on anyones mind if the economy is in the gutter.

 I agree.

 I'm generally not a fan of consolidation, and certainly not on a scale like this. Mergers tend to trade off flexibility and specialization for little more than market leverage. Deals like this rarely produce any gains for the consumer. Even for the companies merging the payoffs are dubious.

I never understand what happens to the money in things like this... I mean who gets how much of that money?

I'm not an expert, but I'd imagine that since their aim is to buy a big part of the company's shares, the money would go to some of Yahoo's shareholders (how much each one gets depends on how many shares they sell to Microsoft).