Microsoft bid caps turbulent week

Microsoft’s offer Friday to buy Yahoo for $44.6 billion in cash and shares put a turbulent end to a heavy earnings week in which forecasts from Internet leaders worried IT investors.

Internet leaders Google, Yahoo, and Amazon and a host of high-profile technology vendors this week reported fourth-quarter sales and generally muted forecasts for the next few quarters.

Microsoft CEO Steve Ballmer’s offer letter to Yahoo’s board of directors on Thursday went public Friday morning, having an immediate effect on company share prices. The offer represents a 62 percent premium over Yahoo’s closing price on Thursday. In premarket trading, Yahoo shares skyrocketed. Shares closed at $28.38, up by $9.20, or 47.97 percent.

Though most analysts said the deal would not likely hurt Google in the short term, Google shares closed down by $48.40, at $515.90. Shares of Microsoft, which has never done a deal this size, were down by $2.15, closing at $30.45.

Considering Yahoo’s likely earnings and share price increases without an acquisition, for the price Microsoft is willing to pay, the offer “seems like a great deal,” said Citigroup analyst Mark Mahaney in a research note.

The proposal capped off a heavy earnings-report week. Though sales for the fourth quarter generally were strong, key companies, including Google and high-flying virtualization technology vendor VMware, fell short of analyst expectations.

In the current economic climate in the United States, where many analysts are predicting a recession, market watchers pounce on bad news.

Yahoo’s fourth-quarter revenue increased, but profit fell to $206 million from $269 million one year earlier. During its financial conference call Wednesday, CEO Jerry Yang announced that the company would be laying off about 1,000 workers and talked about the U.S. economy hitting the company with “headwinds.”

Analysts worry that the company’s Panama search engine ad system, rolled out last year, has not had the positive effect that was expected. They also note that the company is vague about expected investments and that it is appearing to lose further ground to Google in the search market.

In a research note, Citigroup Global Markets Equity Research downgraded its opinion on Yahoo from “buy” to “hold.” But after the Microsoft offer went public, Citigroup called the move “a good fit to fix an ongoing issue.”

Though Google on Thursday reported a 51 percent year-on-year revenue increase to $4.83 billion for the quarter, earnings per share excluding certain items were $4.43, just below the $4.44 consensus analyst forecast. While most companies would be ecstatic to report such strong growth, the market had gotten used to Google continuing to blow past all expectations.

Many market watchers take Google’s miss as a sign that the faltering economy is braking the search giant. If consumers cut back spending, Google may experience a slackening in consumers’ desire to click on advertising. The company’s continuing reliance on search revenue is bothering investors. That issue may be worrying investors more than potential competition with a merged Microsoft-Yahoo.

One bright note for the week in the Internet sector was Amazon’s earnings announcement on Wednesday. Amazon revenue grew 42 percent, to $5.67 billion, as income more than doubled, to $207 million. While the company’s forecast for operating margins was lower than expected, its revenue forecast was higher than expected — welcome news in a climate of worry.

Then on Thursday, Amazon announced it would buy Audible.com , which sparked interest as the acquisition may help its battle against Apple in the market for spoken-word books, magazines, and radio programs. Amazon shares jumped by $3.49 to close at $77.70 Thursday, though they then drifted back down Friday.

Outside the Internet arena, companies in a variety of sectors, including Lenovo, SAP, Verizon, and TSMC, reported strong fourth-quarter sales (though in SAP’s case, profit was brought down by its acquisition of Business Objects). However, as usual in these times of economic uncertainty, it was VMware’s disappointing quarter and weak forecast  that captured the most attention.

The company share price lost 34 percent of its value after VMware said Monday that revenue was $412.5 million, compared to analyst expectations of $417.4 million. Even though profit doubled, it was the revenue miss that had everyone nervous as hopes for the company were high after its red-hot IPO in December.

“The company’s 2008 outlook suggests that low hanging fruit may have been picked and new customer signings could be slowing down,” according to a UBS research note. This comment is probably right on the money. Most big-company CIOs consider server virtualization an obvious tactical move and have already implemented the technology.

By market close Friday, excitement over the Microsoft offer for Yahoo may have helped push the tech-heavy Nasdaq Composite Index into positive territory. It closed at 2413.36, up by 23.50. As economic uncertainty rules, however, IT investors are bracing for a bumpy ride over the next few quarters.