Microsoft, Yahoo In Talks For Alternative Deal
SAN FRANCISCO — Just two weeks after breaking off merger talks, Microsoft Corp. and Yahoo Inc. have been pulled back to the bargaining table by their fears about what might happen if they don't work out a deal.
For now, Microsoft and Yahoo are still dancing around the edges as they explore possible business arrangements without melding the two companies.
Microsoft has proposed slicing up Yahoo in a deal that's unlikely to win over Yahoo, The Wall Street Journal reported Monday.
Under the proposed break up, Microsoft would buying Yahoo's search division and Yahoo would sell its Internet operations outside the United States, according to the Journal's story, which cited unnamed people familiar with the matter. Microsoft would then buy a minority stake in what was left of Yahoo, the people said.
The notion of a half-baked deal didn't seem to excite investors Monday as they got their first chance to react to Sunday's news that Microsoft and Yahoo are talking again.
Yahoo shares rose a scant 0.7 percent, or 2 cents, to close at $27.68 Monday, while Microsoft shares fell 1.8 percent, or 53 cents, to close at $29.46.
But most analysts remain convinced the preliminary talks will culminate in Microsoft buying Yahoo for somewhere between $33 and $37 per share, a price that translates to $47.5 billion to $53 billion.
Both Microsoft and Yahoo issued statements Sunday acknowledging they haven't ruled out the possibility of a merger even though they aren't discussing one now.
Although their discussions fell apart this month in a disagreement over price, both Yahoo and Microsoft have powerful incentives to reach a compromise within the next few weeks.
If Yahoo doesn't stop demanding $37 per share, its board could be overthrown in a shareholder mutiny led by activist investor Carl Icahn.
To pressure Yahoo into reviving the talks, he has nominated an alternate slate of 10 directors scheduled to stand for election at Yahoo's July 3 annual meeting. Icahn didn't respond to a request for comment Monday.
Meanwhile, Microsoft's unwillingness to pay more than $33 per share created an opportunity for its nemesis, Google Inc., to enter an advertising partnership with Yahoo.
"It's becoming pretty clear that Yahoo is either going to work something out with Microsoft or do a deal with Google," said Standard & Poor's equity analyst Scott Kessler. "If Yahoo winds up with Google after all this, it would be pretty damaging to Microsoft."
Microsoft began pursuing a Yahoo takeover in late January largely as a means to counter Google's dominance of the Internet search and advertising markets.
After Microsoft pounced, Yahoo became more receptive to an idea that it had resisted in the past _ allowing Google to show some of the ads alongside Yahoo's search results.
A two-week trial last month demonstrated Google's technology could help boost Yahoo's profits, and the two sides began exploring a long-term alliance. But any partnership between Google and Yahoo likely would face antitrust obstacles because the two companies control more than 80 percent of the U.S. search advertising market.
A similar deal between Yahoo and Microsoft wouldn't pose the same antitrust problems because Google still would control more than half the market.
"We believe that a core issue for Microsoft is to acquire Yahoo on friendly terms," UBS analyst Benjamin Schachter wrote in a Monday research note. "A near-term deal (in search) could act as an intermediate step that would go a long way toward testing the waters."
Just buying Yahoo's search operations might cost Microsoft about $21 billion, Collins Stewart analyst Sandeep Aggarwal estimated in a Monday research note. He values Yahoo's display advertising operations at $14 billion and its international holdings at $9.25 billion.
Yahoo Chief Executive Jerry Yang believes the Sunnyvale-based company is on the verge of a turnaround that will prove it's worth more $50 billion. Starting next year, he has promised Yahoo's net revenue will increase by 25 percent annually _ more than doubling its recent rate of growth.
But Icahn, who owns a 4.3 percent stake in Yahoo, so far has indicated he isn't willing to wait until next year. And many other major shareholders appear ready to back him.
Kessler doubts Yahoo will be able to placate its shareholders by entering a partnership with Google, particularly if the alliance could hurt Yahoo in the long run by subverting its own technology in the critical search advertising market.
"It's almost a no-win situation for Yahoo because they aren't going to get sufficient time to prove they are worth $33 per share or more," Kessler said.
(This version CORRECTS spelling of analyst's first name to 'Sandeep' not 'Sanded')
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MICHAEL LIEDTKE | May 19, 2008 10:46 PM EST |
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