Microsoft Lays Out Yahoo! Integration Plans

SAN FRANCISCO - Keep talking about something as a foregone conclusion, and eventually it will become one.

Microsoft(MSFT Quote) may not have yet raised its spurned bid yet for Yahoo!(YHOO Quote), but the Redmond, Wash., software giant is keeping the mega-merger alive in the minds of Yahoo! shareholders by talking about it.

In a publicly disclosed email to Microsoft employees Friday, Kevin Johnson, president of Microsoft's platform and services business, laid out more of his thinking about the merger, including assurances that once a deal is completed, Microsoft would keep Yahoo! in Silicon Valley.

But he stopped short of saying the Internet company's current main campus would remain its base of operations.

Noting that Yahoo! has 10,000 employees at its headquarters in Sunnyvale, Calif., Johnson said in an email to his employees: "We would be committed to maintaining Yahoo!'s significant presence in Silicon Valley."

But Silicon Valley encompasses several cities. Microsoft also has some 1,800 employees at its own Mountain View, Calif., campus.

Johnson took the opportunity to make the case for the merger. After speaking with executives from big media, "I know there is a desire for more competition in search and online advertising," he wrote. Without the strength derived from combining the two companies, "there's less innovation, less competition and less value being generated for consumers, advertisers, and publishers."

On Feb. 1, Microsoft offered $31 a share, or $44.6 billion, for Yahoo! The latter's board rejected that offer, which has fallen in value to about $41 billion as Microsoft's share price has declined. Microsoft reportedly is contemplating a proxy fight for control of Yahoo!'s board.

Microsoft shares closed Friday at $27.68, down $4.79, or 15% since before the bid was disclosed. Yahoo! is up 48% to $28.42 over the same period of time.

The merger would help Microsoft get more than a toehold in the online advertising market, which is expected to grow to an $80 billion opportunity by 2010. Both companies lag Google(GOOG Quote) in search and search-advertising market share. "We believe our proposal is a compelling one and that the combination of Yahoo! and Microsoft creates a more credible alternative to an increasingly dominant player in the advertising industry," Johnson said.

If and when Yahoo! accepts Microsoft's offer, the companies can jointly begin planning the integration process in parallel with the regulatory review, Johnson wrote.

Not surprisingly, Johnson affirmed that the Yahoo! brand would live on, but deferred decisions about discontinuing individual services. "We are committed to build on the Yahoo! brand," he wrote.

How brands, products and services are integrated into Microsoft would be decided by executives from both companies during the planning process, Johnson stated.

Johnson hedged decisions on how Yahoo!'s non-Windows-based systems would be integrated, noting that some companies acquired in the past have been permitted to remain on their original platforms, with interoperability built on top to bring about integration with Windows. Decisions would be "pragmatic" and based primarily on how changes would affect customers, he added.

In a research note issued Friday, Sanford C. Bernstein analyst Charles Di Bona said "Even without Yahoo!, we continue to believe that Microsoft is well-positioned strategically vs. its traditional competitors and in a reasonably solid position to fight off its newer rivals." Bernstein makes a market in Microsoft shares.

"We continue to believe that Microsoft's share price undervalues the true growth potential of the company," Di Bona wrote.