After a disappointing string of failed takeovers, CNOOC Ltd. (ADR: CEO) has reignited its foreign expansion initiative with a $2.49 billion buyout of Norway’s Awilco Offshore ASA.

China Oilfield Services Ltd., a unit of China’s top offshore oil and gas producer will pay $16.66 (85 kroner) a share, an 18.7% premium to last week’s closing price. Awilco’s board unanimously approved the offer and the deal, which still requires regulatory approval, but should be closed by October. China Oilfield will borrow about $2.3 billion to finance the deal. 

"I think 85 kroner a share is a good price," Stian Eliassen, an analyst at Carnegie ASA in Oslo, told Bloomberg News. "They’re very interested in Awilco’s jack-up rigs, seven of which will be available to be leased by clients next year."

Oil’s record-breaking surge to $145 a barrel has spurred a rush in exploration that has strained the global supply of offshore drilling rigs. Since 2004, the price of jack-up rigs, which are used frequently in shallow water drilling operations, has quadrupled to $200,000 a day, ODS-Petrodata reported.

The deal with Awilco will immediately increase CNOOC’s own fleet of rigs by 47%, taking it from 15 units to 22. The company will control a total of 34 operated platforms once the deal is completed.

"Awilco’s units are modern and basically delivered or coming near to it, so you have instantaneous cash flow," Gavin Strachan, an ODS-Petrodata research consultant told Bloomberg News. "You make more money by buying newly delivered rigs than by putting in an order for a new rig, because cash flow will be very significant over the next couple of years."

"If you put in an order for an offshore rig today, you’ll generally get it delivered in 2011," he added.

The acquisition will also expand China Oilfield’s overseas operations, which accounted for just 18% of its revenue last year. The company would like overseas revenue to account for 30% of its total income by 2010.

It’s also a step forward for CNOOC, which has been looking to expand but has been unable to secure a solid foothold abroad.

"Our aim is to become an international oilfield services company with strong competence in global markets by 2010. That cannot be achieved just by organic growth," China Oilfield CFO Zhong Hua said at a press conference yesterday (Monday), adding that the company would continue to pursue more acquisitions.

But CNOOC has seen its share of failures, having failed to obtain Russian oil services firm STU from TNK-BP for more than $10 million, and in 2005, was forced to abandon its $18.5 billion bid for Unocal after a political uproar in the United States.

CNOOC has taken the lessons of the past to heart, as the deal with Oslo-based Awilco marks a shift in strategy.

"Compared with U.S. firms, European companies have less political obstacles for Chinese companies to make acquisitions," BOCI analyst Lawrence Lau told Reuters.

China Oilfield has said it views Russia, the Middle East and the Gulf of Mexico as strategic markets it needs to explore.

News and Related Story Links:

• Reuters:
  China Oilfield to buy Awilco for $2.5 bln

• Bloomberg:
  China Oilfield Agrees to Buy Awilco for $2.49 Billion

• Money Morning:
  Cashing in on Commodities: What’s Driving the Oil Bull, How Much Further It Will Go, and How Investors Can Profit

Swiss pharmaceutical kingpin Novartis AG (NVS) has agreed to buy Nestle SA’s (PINK: NSRGF) 77% stake in U.S. eye care company Alcon, Inc. (ACL) – a deal reportedly worth up to $39 billion, Novartis said in a statement.

Novartis will first acquire a 25% stake from Nestlé for $143.18 per share (about $11 billion), by the second half of this year.

Story continues below…

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In the optional second step, it can acquire the remaining 52% for a fixed price of $181 per share (about $28 billion) between January 2010 and July 2011. Nestle has the right to require Novartis to buy its remaining Alcon stake.

Following completion of the transaction’s first step, Novartis will have a representative on Alcon’s Board of Directors. Alcon and Novartis will remain separate and independent companies.

The acquisition will add the world’s eye care leader to Novartis’ portfolio, much of which is focused on prescription drugs that are facing increased competition from generic drug manufacturers. Alcon’s eye care products range includes surgical, pharmaceutical and consumer products. 

"This acquisition furthers our strategy of accessing high-growth segments of the healthcare market while balancing inherent risks. The strategic fit of Alcon and Novartis is excellent with our complementary product portfolios and R&D synergies. Eye care will continue to grow dynamically as there is a growing unmet medical need driven primarily by the world’s aging population," Dr. Daniel Vasella, Chairman and CEO of Novartis, said in a statement.

For Nestle, the deal will give the world’s largest food group a big chuck of capital for acquisitions and streamline its holdings.

"We consider Nestle’s move as a positive step in its transformation into a ‘health, wellness and nutrition’ company," Claudia Lenz, a Vontobel Holding AG analyst, told Reuters. "Moreover, the reduction in net debt gives Nestle scope for further share buyback programs."

News and Related Story Links:

• Novartis:
  News release

• Reuters:
  Novartis to buy Nestle’s Alcon stake for $39 billion

What would have been one of the biggest acquisitions of the now moldering corporate buyout boom looks to be unraveling as banks, suffering from a drought of liquidity, balk on financing the transaction.

Clear Channel Communications (CCU) dropped 16% yesterday after the Wall Street Journal reported the planned takeover of the company by Thomas H. Lee Partners LP and Bain Capital LLC might fall through.

"Right now, there is no credit agreement. And without a credit agreement, we have no deal," the Journal cited a source close to the deal as saying.

Banks such as Citigroup Inc. (C), Morgan Stanley (MS), Deutsche Bank AG (DB), Credit Suisse Group (CS), Royal Bank of Scotland Group PLC (RBS), and Wachovia Corp. (WB) originally agreed to finance the $19.5 billion deal at $39.20 a share in 2006. But those banks stand to lose about $3 billion on the transaction because since then loan prices have tumbled.

"Private equity refused to bend on price from $39.20 and the lending syndicate isn’t convinced Clear Channel will generate enough cash flow to cover the debt," David Miller, an analyst with SMH Capital in Los Angeles, told Bloomberg. "Radio values have compressed. This deal looks a lot more expensive now."

Clear Channel, America’s largest radio broadcaster, looked to be a solid acquisition when the deal was first struck in November 2006. The company’s radio revenue rose 7% in the final quarter of 2006, and 3% in the first quarter of 2007. Outdoor advertising revenue rose 13% in the last quarter of 2006 and 15% in the first quarter of 2007. 

The original deal priced shares at $37.60 a share, but shareholders who considered that price too low convinced Lee Partners and Bain to raise their offer. After that, the deal began to sour. Growth in the company’s radio operations began to dwindle, and share prices dropped significantly.

Now, a dearth of liquidity has made it nearly impossible for banks to limit their risk by selling their loans to investors. The financiers of this deal have demanded more cash upfront and stricter payment terms, but the buyers have refused, leading to a standoff.

The banks are at risk legally, and may have to pay a "breakup fee" if Thomas H. Lee Partners and Bain Capital are forced to pull out of the deal. That fee could be as much as $600 million, but that would be substantially less than the $3 billion the banks stand to lose by actually going through with the deal.

"It’s cheaper for the banks to pay breakup fees and get the loan off their books than try to syndicate these loans at 95 to 85 cents on the dollar," Mark Patterson chairman and cofounder of MatlinPatterson Global Advisers LLC, told Bloomberg.

Both parties involved have stressed that a deal is still possible but sources close to the situation say that barring any last-minute settlement, the matter will likely end up in litigation.

One source told the Wall Street Journal that the negotiations have devolved into a bizarre "kabuki" dance, where both sides want to appear committed to the deal for legal purposes.

"None can be seen publicly speaking against the deal," one source told The Journal, "It’s a game of who blinks first."

News and Related Story Links:

• Wall Street Journal:
  Major Buyout Deal Is Close to Collapse

• Bloomberg:
  Clear Channel Drops on Concern Buyout May Collapse

• Bloomberg:
  Clear Channel Banks May Lose $3 Billion If Buyout Goes Ahead

Tata Group Chairman Ratan Tata said he would like to buy a stake in luxury sports car Ferrari, a unit of Torino, Italy-based Fiat S.p.A (OTC: FIATY).

Tata is a Fiat board member and has a marketing and manufacturing alliance with the automaker for his India auto operations.

"I have two passions in my life, cars and aircraft. I have always dreamed of being able to be a fighter pilot. And I confirm the wish to participate in Ferrari’s shareholding," Tata told L’Espresso magazine in its latest issue. "Luca di Montezemolo (both Fiat and Ferrari chairman) has invited me to look around in Italy because his country offers a lot of opportunities in the design and luxury sectors."

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Tata’s intentions are clear – he wants quality and quantity. His flagship automaker, Tata Motors Ltd. (TTM), is weeks away from closing the deal for luxury lines Jaguar and Land Rover. Meanwhile, the company also produces the Nano, the $2,500 compact [and we stress the word compact] that was recently the buzz at the Geneva Auto Show.

A more upscale version of the Nano is set to hit the European car market, but a ballpark date hasn’t been established.

"The Nano will address global markets in due course but when it will do so has not been decided," Tata told auto show goers, the Times of India reported. 

News and Related Story Links:

• Reuters:
  India’s Tata interested in Ferrari stake – report

• Economic Times:
  Nano leads India’s small car challenge
• Times of India:
  Tata’s Nano: High-end version to hit Europe

Diebold Inc. (DBD), a top maker of voting machines and automated teller machines, rejected an unsolicited $2.63 billion bid from United Technologies Corp. (UTX) yesterday (Monday).

The offer amounted to $40 a share, a 66% premium over Diebold’s Friday closing price of $24.12.

Diebold Chairman John Lauer called the approach "an opportunistic attempt to buy Diebold at a time when shareholders do not have sufficient data to evaluate the offer and as such, the board believes that it would be irresponsible to engage in discussions with UTC at this time."

United Technologies produces a wide variety of high-tech products and services – including Otis elevators, UTC Fire & Security systems and Carrier heating and refrigeration.

James Geisler, United Technologies’ vice president of finance and the head of its mergers and acquisitions team, said similar offers made in the past two years  [Diebold's stock was trading around $40 a share in March 2006] have been declined.

Diebold said its board met to discuss United Technologies’ interest in a potential tie-up at least three times recently. However, the company’s board still isn’t convinced that a merger would be in the best interest of the corporation or its shareholders at this time.

Diebold has conceded to a U.S. investigation of its accounting practices and recently announced plans to cut 5% of its workforce. In 2004, it was criticized for flawed electronic voting machines. Stock fell about 48% since in the past year.

United’s Geisler said having Diebold’s roster of products would expand his company’s electronic security business. And United Technologies’ ground crew of sales and maintenance for its Otis elevator line could be adapted to the ATM business, Geisler told the Chicago Tribune.

Last year, United Technologies bought Initial Electronic Security Systems for about $1.2 billion.

Shares of Diebold soared 61.03% with a $14.72 gain to close at $38.84 yesterday.

News and Related Story Links:

• United Technologies Corp.:
  United Technologies proposes acquisition of Diebold for $40.00 per share in cash
• Chicago Tribune:
  $3 billion takeover bid for Diebold

Staples Inc.’s (SPLS) $3.7 billion (2.5 billion euro) takeover offer for Dutch rival Corporate Express N.V. (CXP) was promptly rejected yesterday (Tuesday).

The all-cash offer valued shares at a 34% premium to Monday’s closing price on the Dutch Stock Exchange – sending the company’s stock up 38.94% for the day Tuesday. But Corporate Express executives said the "unsolicited" offer still doesn’t agree with their estimates and intentions.

"Corporate Express is of the opinion that this proposal significantly undervalues the company and fails to reflect Corporate Express’ prospects. We do not believe the proposal is in the best interests of our shareholders and other stakeholders," the company said in a statement. "We therefore reject this proposal and reiterate our commitment to pursuing our declared strategy."

That might be an overstatement, as the company’s stock has had a terrible year – falling from its 52-week high of $15.45 in July to $5.20 in January because of disappointing earnings. Takeover rumors and a generous takeover offer were the only cause for the shares recent bump in value.

Talk of a takeover has swirled since Feb. 5, when news broke that Corporate Express was subject to a buyout, Dow Jones reported.

OfficeMax Posts Profit, Issues Warning

In related news, share of Staples rival OfficeMax Inc. (OMX) rose nearly 8% during day trading after it announced profit rose 23% to $71.5 million, or 92 cents a share, for the fourth quarter.

The Naperville, Ill.-based company made a significant effort to cut costs after a year of disappointing sales and earnings, the Wall Street Journal reported.

Still, its latest earnings report shows that sales for the country’s third-largest office supplier declined for the quarter and the company expects the slow U.S. economy to affect sales this year.

News and Related Story Links:

• Dow Jones:
  Staples Makes EUR2.5 Billion Corporate Express Bid

• Wall Street Journal:
  Cost-Cutting Helps OfficeMax Net

Google Inc. (GOOG) didn’t waste any time before weighing in on Microsoft Corporation’s (MSFT) takeover bid for Yahoo! Inc. (YHOO). Google officials lashed out against Microsoft’s supposed motives yesterday [Monday], and even offered to help Yahoo! rebuff the takeover through a partnership of its own.

"While the internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies – and then leverage its dominance into new adjacent markets," Google’s top lawyer, David Drummond said in a posting on the company’s blog.

The International Herald Tribune cited sources familiar with Google’s operations as saying that company lobbyists are already appealing to lawmakers in Washington in an effort to stall or derail the deal.

Google Chief Executive Eric Schmidt also reportedly made a call to Yahoo’s CEO Jerry Yang and offered his company’s assistance in fending off the bid. Several other Google executives made "back channel" calls to companies such as Time Warner Inc. (TWX), owner of AOL, to determine whether a rival bid was planned.

Few analysts believe a bidding war with Microsoft is likely because the company has such deep pockets. Microsoft had $21.1 billion in cash and short-term investments as of Dec. 31. The company may be forced to borrow money for the first time ever to finance its proposed $44.6 billion takeover. Microsoft has proposed paying half of the offer with stock and the other half with cash.

Still, Yahoo insists that it has received calls from a number of suitors over the weekend. A tie-up between Google and Yahoo is not out of the question either. Talks between the two search engines stalled last year, but Yahoo may find more favorable terms if it aligns itself with its former rival now that Microsoft is in play.

Microsoft has done its best to deflect criticism.

"The combination of Microsoft and Yahoo will create a more competitive marketplace by establishing a compelling No. 2 competitor for Internet search and online advertising," Microsoft’s general counsel, Bradford L. Smith, said in a statement. 

It’s a fair point considering Google drew 56% of U.S. web search traffic in December, nearly double the combined share of Yahoo and Microsoft, which attracted 18% and 13% of the market, respectively.

However, Microsoft’s reputation as a borderline industry thug is working against it.

"Google can tap into all of the ill will that Microsoft has created in the last couple of decades on the antitrust front," Eric Goldman, director of the High-Tech Law Institute at Santa Clara University School of Law told IHT.

But Microsoft isn’t the only company accused of antitrust issues. Google did its share of feather rousing last April when it bid $3.1 billion for online advertising specialist DoubleClick.

"This proposed acquisition raises serious competition and privacy concerns in that it gives the Google DoubleClick combination unprecedented control in the delivery of online advertising, and access to a huge amount of consumer information by tracking what customers do online" Microsoft’s Smith said in a statement. "We think this merger deserves close scrutiny from regulatory authorities to ensure a competitive online advertising market."

Here are the top five technology deals involving Silicon Valley companies over the past five years, including Friday’s proposed acquisition of Yahoo by Microsoft.

Footnotes: (1.) Value When Announced.

Sources: Bloomberg News, San Jose Mercury News, Money Morning Research.

[For further analysis on Microsoft Corp's attempted takeover of Yahoo Inc click here]

News and Related Story Links:

• Money Morning:
  Microsoft Launches $44.6 Billion Hostile Buyout Bid for Search Pioneer Yahoo!

• Microsoft:
  Microsoft Statement on Proposed Acquisition of DoubleClick by Google

• Bloomberg:
  Microsoft May Borrow for First Time to Buy Yahoo

• International Herald Tribune:
  Google offers Yahoo help to deflect Microsoft’s bid

With its $44.6 billion hostile bid for Internet search pioneer Yahoo! Inc. (YHOO), software giant Microsoft Corp. (MSFT) is poised to redefine the deal-making market.

According to an analysis of the deal conducted by the San Jose Mercury News, this is more than just a simple acquisition: The hostile buyout bid confirms Google Inc.’s (GOOG) dominance of the Internet search-and-advertising markets, even as it underscores Google’s stranglehold dominance on both of those high-tech venues.

It also stands as the best evidence yet that Microsoft is no longer the feared behemoth that ruled whatever market niche it entered, and that was able to dictate standards throughout the high-tech sector.

Google’s lead in the all-important Internet search arena is so commanding that Microsoft and Yahoo can only hope to give it a run by combining forces – even though Yahoo remains the single-most-visited Web site in the world.

After spending millions in a vain attempt to establish itself as the leader in Internet search, Microsoft has abandoned its "go-it-alone" strategy, believing that after forming a dynamic duo with Yahoo, together they can achieve what it wasn’t able to do while flying solo.

But this strategy – which an advertising executive somewhat derisively dubbed the "one plus one equals three" approach – may not be a panacea, either, for some real challenges remain. Just getting the deal done could be an unachievable objective. Only time will tell.

For now, here are some of the challenges that a Microsoft-Yahoo linkup faces:

• Antitrust issues could easily take two years to work out.

• A corporate culture class between the work forces of Microsoft and Yahoo could mute the merger’s benefits – assuming the deal even gets done.

• Regulatory approvals won’t be easy to get, especially since most government bureaucrats still view Microsoft as the powerhouse it once was, and don’t see the nuances that have caused its market power to ebb.

And there’s one other key point to consider: If any of these obstacles prove problematic – that is, if the Microsoft-Yahoo marriage gets bogged down in negotiations, regulatory approvals, or as an ultra-messy integration – the real beneficiary of this buyout could be Google. As the merger gets drawn out, it could become a major management distraction that allows Google to enhance its already large lead.

Let’s consider a few of these issues, as well as the catalyst for the deal, itself.

The Allure of the Deal

During a conference call late last week, Microsoft Chief Executive Officer Steven A. Ballmer said that, "when you combine the strengths of our two companies, the result will be an incredibly efficient and competitive offering for consumers, for advertisers and for publishers."

After first approaching Yahoo concerning a merger about a year ago, Ballmer said he finally called Yahoo CEO and co-founder Jerry Yang last Thursday to tell him Microsoft was launching the bid.

For Microsoft, the attraction is that the two companies compete in three key areas. Presumably, the software giant’s leaders believe that by combining these capabilities, a stronger enterprise will result.

Among those businesses, the key one is Internet search: At the beginning of last year, Yahoo controlled 26.9% of this market, and Microsoft 10.4%. Google carried the day with a mammoth 52.6%, according to high-tech researcher comScore. But by December, Yahoo watched its market share slip to 22.4%, while Microsoft skidded to 9.8%. Google gobbled up what those two lost and more besides, picking up six percentage points to control 58.6% of the market. 

So even if the merger goes through, the market’s No. 2 and No. 3 companies would merge to create a larger No. 2 that’s still only about half the size of Google in terms of Internet search market share.

Yahoo bills itself as being the "most visited site on the Web." By the end of last year, however, Google had leapfrogged both the Microsoft and Time Warner sites to take the second spot behind Yahoo, on which it also markedly closed the gap.

Antitrust Issues

Microsoft predicted – quite confidently – that it would get federal approval for the Yahoo deal this year. The deal also will have to gain the approval of shareholders.

Analysts who follow the industry say that antitrust issues will take two years to work out, especially since Yahoo Mail and Microsoft’s Hotmail account for 95% of the Web mail market.

Microsoft can expect a review by the U.S. Department of Justice, the Federal Trade Commission – or both. And the European Commission will definitely scrutinize the deal.

The potential obstacles include:

• Concerns that the buyout would give Microsoft most of the market for Web-based e-mail and instant messaging, making it the key Internet gatekeeper.
• Worries about privacy, given the increasingly powerful feature sets that Internet search engines contain.
• A concern that if Microsoft bundles Yahoo’s portal with such services as e-mail that it will be able to regain the market-controlling high ground it possessed a decade ago.

If it takes a year for federal regulators to approve the deal, that approval process could get pushed into the next administration, making it a big wild card. The Bush administration has been fairly lenient in approving big mergers, but there’s no guarantee the next administration would feel the same way.
Google, too, could raise antitrust concerns, but most experts say the company will have to tread lightly.

But it may not have to worry: Congress could play that very role. Congress has already announced it would hold antitrust hearings on the Microsoft-Yahoo bid, with House Judiciary Chairman John Conyers Jr., D-Mich., and ranking Republican Lamar Smith, R-Texas, stating in a joint statement Friday that the proposed deal raises "competitive issues," according to a report by Information Week.

In the end, the deal will probably be allowed to go through. Unless the government can prove that someone will offer more, or will do a better job running Yahoo, which is a company in decline, "it’s going to be hard to get the government to launch a thousand ships to stop the deal," Gary L. Reback, of Carr & Ferrell in Palo Alto, told the Mercury News.

Culture Clash

Whether Microsoft executives will publicly admit this is a whole different story, but analysts say that the company will face huge challenges in its efforts to meld the two corporate cultures. While both are ostensibly high-tech firms, Yahoo is essentially a Silicon Valley-based media company, while Microsoft is an engineering-focused software firm that operates in the relative isolation of Washington state – far from the influences of Silicon Valley.

As one media report noted, employees at Yahoo work in cubicles – the norm in fast-paced Silicon Valley – while offices are de rigueur at Microsoft.

The track record for successful integrations in the Internet sector is not great, with the badly miscalculated AOL Time Warner [Time Warner Inc. (TWX)] deal serving as a case in point. Exacerbating that concern is the reality that Microsoft has little experience with big acquisitions – and this one is massive, and will take years to make work.

The key issues:

• What will become of such key branded products as Yahoo, MSN and Windows Live, or the overlapping properties, such as MSN Money and Money and Yahoo Finance, or Yahoo Mail and Hotmail?

• Will it be possible to combine the different technologies that sit behind and power these key products, since the technology and the products together create the value Microsoft is buying and hopes to extract?

• Who will lead the combined Web division?

• And, most of all, will Microsoft be able to minimize or even eliminate the clash between employees and managers who come from two very different corporate cultures?

Microsoft contends it already is working this out. But the company literally took years to integrate Great Plains Software and Navision, even though both had Microsoft-friendly technology and were a fraction of the size of aQuantive – a $6 billion deal that’s Microsoft’s biggest to date, analysts say. And it’s too early to tell how it’s done with its buyout of aQuantive last year.

The industry doesn’t have a great track record when it comes to integrating new properties. Internet-search-engine-pioneer Netscape virtually disappeared after it was bought by America Online, which, in turn, lost market share and importance after it was bought out by Time Warner. And Yahoo stumbled in its attempt to integrate Overture, an Internet firm it bought in 2003.

One other thing: With a high-tech company, the most-valuable assets of all are able to walk out the door at the end of each day. To really get full value, Microsoft has to persuade Yahoo employees to stick around after the deal closes.

None of these challenges are insurmountable. And Microsoft has billions of dollars in cash to throw at any problem.

Lastly, Microsoft seems to understand that this deal is crucial to its ability to finally reposition itself into a position of importance in the Internet sector.

"It’s going to be hard. There are going to be some rough spots. But eventually, it’s going to work out," Karsten Weide, an analyst with the market researcher IDC, said in an interview over the weekend

Could Google be the Big Winner?

As this all plays out, Microsoft has to be very careful that the deal doesn’t serve to lengthen Google’s already-big lead.

For one thing, many analysts are criticizing Microsoft’s strategy by alleging that the deal, as proposed, does almost nothing to attack Google’s ever-expanding Web dominance.

Indeed, in an ironic twist, it may well be Google – which some analysts have nicknamed "The Mighty Mammoth of Mountain View" – that ends up as the biggest winner from a Microsoft-Yahoo merger.

While the new company – which one industry wag says could be named either Microhoo or YahooSoft – would have more Web traffic than Google, there’s a problem. Right now, Yahoo has an edge with display advertisers, so the traffic boost should give the newly combined firm a real boost.

But if it takes two years to get the deal approved, and another two to get the merged entity straightened out, any advantages that the Microsoft-Yahoo alliance brings to the table could well evaporate.

Google has already leapt into the wireless phone market, striking global deals and promoting an open handset standard. The firm is even looking to wager billions to buy U.S. wireless spectrum to launch its own wireless voice-and-data services business.

Competitive Advantages

All is not lost. With its top-rated consumer Web portal, My Yahoo, Yahoo still boasts tens of millions of loyal users. Microsoft’s operating systems still run 90% of all desktop computers and a big percentage of the servers that manage the Internet.

If Microsoft could pick the best products, services and technology from each company, and do so quickly and efficiently, it could assemble a powerful PC-and-Internet venture.

But as one columnist noted, at its press conference, Microsoft sounded more like it was talking about the steel industry than anything related to software, the Internet or technology. Microsoft execs emphasized the "economies of scale" offered by the deal, referring to savings on research & development, equipment and labor.

Google, however, is a brand. And, as a company, it is both innovative and relentless. It started out offering a simple search service, and has continued to add products and features that have secured its market position and increased its market power.

At the end of the day, the big question to be answered about the Microsoft-Yahoo deal isn’t whether it will happen, or even when it will happen. For it’s very likely it will come to pass.

The real question is whether it will work – and whether Microsoft has the ability to make it work.

[Editor's Note: For the latest developments in the Microsoft-Yahoo buyout battle - including Google's potential intervention - in today's issue of Money Morning, please click here].

News and Related Story Links:

• Information Week:
  Congress to Hold Antitrust Hearing on Microsoft’s Yahoo Bid

• San Jose Mercury News:
  Microsoft’s bid for Yahoo: Would it work vs. Google?

• Money Morning:
  Microsoft Launches $44.6 Billion Hostile Buyout Bid for Search Pioneer Yahoo!

• San Jose Mercury News:
  Is Microsoft bid for Yahoo a culture clash in the making? There are "Messy" Issues in an Acquisition

• San Jose Mercury News:
  Antitrust approval for Yahoo deal may not be a slam-dunk

Microsoft Corp. (MSFT), the world’s biggest software maker, has made an unsolicited $44.6 billion bid for search engine Yahoo! Inc. (YHOO).

Microsoft has offered $31 per share in cash or Microsoft stock, a premium of 62% over Yahoo’s closing price Thursday. Yahoo stock rose 53% in pre-market trading, after plummeting 18% in January.

Yahoo has struggled to compete with rival Google Inc (GOOG), suffering eight straight quarters of declining profits. Just a few weeks ago, Yahoo posted a 23% decline in fourth-quarter profits. Meanwhile, Google late yesterday (Thursday) reported a 52% increase in fourth quarter sales growth, its 14th straight quarter over 50%.

[However, Google shares dropped 9.6% after the opening bell today because the profits fell short of analyst expectations. Worries about how the slumping U.S. economy might affect Google's earnings power have contributed to a January decline in the company's stock price that approached 20%, The Associated Press reported].

Google drew 56% of U.S. web search traffic in December, nearly double the combined share of Yahoo and Microsoft, which attracted 18% and 13% of the market respectively.

Microsoft and Yahoo considered various avenues of cooperation a year ago, but Yahoo rejected the notion of a takeover. Now, desperate to not let Google run away with the market, Microsoft has made its move.

"A year has gone by, and the competitive situation has not improved," Microsoft Chief Executive Steve Ballmer said in a letter to Yahoo’s board.

"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," Ballmer wrote.

By offering a fat premium to downtrodden Yahoo! investors at a time when there’s little hope of a 2008 turnaround, Ballmer and Microsoft have really tightened the screws on Yahoo!’s top executives – possibly putting them in a position where they can’t turn the offer down.

"Microsoft if under massive pressure to expand its Internet business to fend off competition from rivals such as Google and this deal shows how desperate they are," Thomas Radinger, a fund manager at Pioneer Investments, told Bloomberg News. "It’s a huge gamble as the price is very steep and it will take years to successfully integrate such a massive acquisition," he said.

The purchase will be the largest acquisition ever made in the technology industry, exceeding even Kohlberg Kravis Roberts & Co.’s $26 billion buyout of First Data Corp.
Microsoft expects that, in taking over Yahoo, it will benefit from economies of scale in the online advertising market, will gain greater operational efficiency, and will benefit from the pooling of engineering and creative talent.

"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 R. Johnson, Microsoft’s president of platforms and services.

While analysts are scrutinizing the potential Microsoft/Yahoo! tie-up, they are also debating just what caused Google’s fourth-quarter results to come up short.

"There is a lot to scratch my head over about in this [report]," Jackson Securities analyst Brian Bolan told The AP late Thursday. "I might be up all night trying to figure it out."
Google CEO Eric Schmidt rebuffed the notion that the economy undercut Google’s growth.

"I am happy to say we have not seen a negative impact from the rumors of a future recession," Schmidt told analysts during a conference call.
Company co-founder and President Sergey Brin told journalists that the company hasn’t seen any evidence that the recent turbulence in the U.S. economy or the volatility in the global securities markets is affecting Google’s business.

"I think things are going really well," Brin said.

Google said it earned $1.21 billion, or $3.79 per share, during the final three months of 2007. That’s a 17% percent improvement over net income of $1.03 billion, or $3.29 per share, reported during the fourth quarter of 2006.

This is the first time that Google’s quarterly profit has climbed by less than 25% since the Mountain View-based company went public nearly 3 1/2 years ago.
Fourth-quarter revenue totaled $4.83 billion, a 51% percent improvement over the $3.21 billion reported during the same quarter the year before.

In terms of a statistical measure that’s more crucial to investors, Google retained $3.39 billion in revenue after paying fees to the thousands of Web sites in the online advertising network that fuels its profits. That net revenue figure missed analyst estimates by about $60 million.

Total paid clicks in the fourth quarter rose 30% from the same period in 2006. In the first three quarters of 2007, Google’s paid clicks were rising at a clip of 45% to 52%.

For all of 2007, Google earned $4.2 billion, or $13.29 per share, a 37% improvement over $3.08 billion, or $9.94 per share, in 2006. Revenue in 2007 totaled $16.59 billion, a 56% increase from the $10.6 billion reported for all of 2006.

Google shares were trading at $514.97 at 11:30 a.m. today. Over the last 52-weeks, Google’s stock has traded as high as $747.24, and as low as $437. The shares were down 31% from that high-water mark.

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A highly publicized rogue trader scandal has again made Societe Generale (SCGLY) the target of speculation about a possible takeover bid. But that speculation may be premature considering all of the prospective hurdles involved.

The collapse of mortgage-backed assets, a depleted U.S. market, and a rogue trader scandal that cost SocGen $7.2 billion, have done significant damage to the company’s reputation and its stock price.

In the past two weeks SCGLY stock has plummeted 26%. The company’s Paris-based shares (FR: 013080) fell nearly 4% to $104.32 (70.94 euros) yesterday (Monday). And Morgan Stanley (MS) has downgraded the stock from ‘Buy’ to ‘Hold.’

Additionally, last week’s trading scandal exasperated an already unnerving position for the bank. Jerome Kerviel racked up a $7.2 billion loss for the company after betting approximately $73 billion that the European market would rise. The fraud took place in SocGen’s derivatives unit, one of the most prestigious in the world.

The bank has previously been linked to potential bids from Italy’s UniCredito Italiano Corp. and domestic rival BNP Paribas (BNPQY). In its weakened state, the United Kingdom’s Barclays PLC (BCS) may also top the list of predators hungry for such an opportunity as this.

Barclays failed to acquire ABN Amro (ABN) last year, when it was beaten out by Royal Bank of Scotland (RBS) and its partners. While Barclays has since secured more shareholders in China and Singapore, its shares are trading more than 30% below last February’s peak. So a move on SocGen, while possible, may not necessarily be in Barclays best interest.

"Most banks’ excess capital has vanished over the last month, and the share prices have dropped," Deutsche Bank analyst Brice Vandamme told MarketWatch. "Such a deal would thus imply a large part of wholesale funding, which makes it difficult to realize, taking into account the current funding conditions."

Even a larger bank like UniCredito or BNP Paribas might encounter some difficulties. UniCredit is still working through its merger with Capitalia. And BNP, already the largest bank in France is looking to expand in emerging markets, where there is more room for earnings growth.

Any potential suitor could run into government resistance as well. It’s likely that politicians and officials might be less than willing to turnover one of the nation’s bellwether financials to a foreign investor.

Speaking on French radio Sunday, Henri Guaino, Nicolas Sarkozy’s chief political strategist, said that it is likely the government would intervene.

"In this case I don’t think the state would remain with its arms crossed if someone, whoever the predator, tried to take advantage of the situation," Guaino said in a television interview when asked if Sarkozy would defend SocGen from foreign rivals. 

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