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As I told my IS 7010 class last night, Microsoft wants to buy Yahoo. Microsoft made the announcement this morning (AP, New York Times, ValleyWag, BoingBoing). The offer is almost US$45 billion in cash, or $31 per share.

Note: I didn’t discuss this story with anyone I know at Microsoft (MSFT) or Yahoo (YHOO) , and I don’t own stock in either company.

This deal has been anticipated for almost a year now, ever since former Yahoo CEO Terry Semel spurned another Microsoft offer to purchase Yahoo. Microsoft needs Yahoo’s technology, user base and web properties to battle Google. Here’s a 10 January 2008 blog article that discussed a few aspects of an anticipated merger, and a response that more or less said such a deal was a fantasy.

As the New York Times points out, this offer is well-timed. If Yahoo doesn’t come to terms quickly, Microsoft can pursue a hostile takeover through several means, including a board takeover at Yahoo’s June annual meeting.

Yahoo has lost its yodel

Yahoo co-founder Jerry Yang took over as the company’s CEO last year. He hasn’t helped a great deal, but he may be one of the few Yahoo CXOs to remain after Microsoft cleans house. Co-Founder David Filo will go to work in Microsoft’s data center division. As ValleyWag points out, if Microsoft wanted to keep the remaining CXOs, this would have been a friendly takeover offer.

This BusinessWeek article is mild compared to other criticism of Yahoo that I had read in the Wall Street Journal, SearchEngineLand and Screenwerk.

The company had previously announced that it was laying off 1000 employees. Financial results were below expectations, and the online advertising market is in flux. Yahoo depends on ad revenue to fund its acquisitions, but Microsoft, Google and other companies have been more aggressive.

Yahoo is also losing a significant chunk of its guaranteed revenue from AT&T’s residential DSL business. A new web advertising deal for AT&T’s mobile network may cushion the blow. Yang promised a plan to renew Yahoo within his first 100 days. After 200 days, stakeholders are still waiting.

Microsoft needs Yahoo’s position in web advertising, and could easily absorb Yahoo’s large international user community. After that, it’s a sorting process that’s similar to what HP did with Compaq. There is a great deal of overlap between the Microsft’s and Yahoo’s web services, including search, webmail, IM, online images, social bookmarking, and news. I’m sure Microsoft’s CXOs have an initial plan, but the merger – if it does happen – would take 2 years before the dust settles. SearchEngineLand has posted a long article that discusses what might happen in each business unit.

In a way, I’m almost sad to see Yahoo in play. I still use my first Yahoo ID, which has a space character in it. Yahoo fixed that hole a few months after I set up that account in 1996.

The company was the first major commercial Internet search portal, but it’s best days were in the 20th century. I have often used Yahoo’s main page as an example of cluttered web design and as a symbol of an overly broad corporate strategy. MSN.com’s main page isn’t much better.