The big news of the day is that Microsoft has made an unsolicited 44 billion dollar takeover bid for Yahoo in their quest to compete effectively with Google.

This is important to readers of this blog for several reasons:

• If the stats are reliable, the vast majority of you are reading this blog on machines running software made by Microsoft.
• Most of you use either Google Or Yahoo as your search engine of choice (I cannot know this, but statistically, this is the way to bet)
• All of them offer financial data: I have talked about Yahoo and Google at length.
• It is a perfect, high profile opportunity to explain some concepts regarding takeovers.

First, in the story mentioned above, note that the offer is unsolicited. This means simply that Yahoo did not seek a buyer, Microsoft merely offered it. This is very important, because Yahoo is not in enough trouble to actually need Microsoft at this time. Rather, Microsoft sees the value of Yahoo to be worth a premium (better than 60% over the closing price yesterday) to the listed price.

This is not (not yet, anyway) a takeover. If Microsoft put the word out that they were willing to buy any Yahoo shares from anybody at $31 a share (their offer to Yahoo), then that would be considered a takeover attempt. Right now, they are merely talking and an offer is on the table.

This is also interesting from a value investing perspective. The reason Microsoft is willing to offer a premium is they believe Yahoo is undervalued at the current price. At least, they believe it is for sale for much less than it is worth to them.

Also interesting is that most of the time, these sort of offers are done behind closed doors. The reason Microsoft made this offer public is that this way, it is much harder for Yahoo to say no without having to do serious explaining to the shareholders. After all, if you are holding Yahoo stock you bought several months ago at $34 and now it is at $22, you will want to know why the company refused an offer of $31 for it.

Will the purchase happen? So far, it is only talk. One thing is for certain however; if Microsoft buys Yahoo, it has the potential to change everything.

Current Quotes for Yahoo, Google and Microsoft