Thursday, February 14, 2008

Can Yahoo avoid being gobbled up by Microsoft?

Can Yahoo avoid being gobbled up by Microsoft?

Many analysts say it is increasingly unlikely.

Since Microsoft first made public its buyout offer on Feb. 1, Yahoo has held talks with several potential partners, including Google, the News Corporation and Time Warner’s AOL unit, about an alternate deal that would keep Yahoo out of the hands of the software giant.

While some of those conversations continue, no deal has emerged and a growing chorus of analysts and investors say it is improbable that anyone will come up with an offer that is more attractive to Yahoo shareholders than Microsoft’s, which was originally valued at $31 a share.

“It seems like Yahoo’s strategic options are relatively limited,” said Mark Mahaney, an analyst with Citigroup. “It is hard to see a scenario that could create as much value for shareholders as quickly as a Microsoft offer.”

The latest to have intensified talks with Yahoo is the News Corporation, but participants on both sides describe the discussions as “a long shot.”

The talks center on merging some of Fox’s interactive assets — led by MySpace — with Yahoo. The News Corporation would emerge as a major shareholder of Yahoo. It is engaged in the talks partly because, as one participant said, “there’s nothing to lose.”

The News Corporation had sought a similar combination of MySpace and Yahoo last year, people involved in the talks said, but Yahoo rebuffed the overture before a formal bid was ever made.

At the time, the News Corporation had teamed with Providence Equity Partners, a private equity firm that focuses on media. The latest round of discussions is unlikely to include Providence, these people said, though it remains a possibility.

Yahoo and the News Corporation both declined to comment.

The talks with the News Corporation follow a show of interest from Google, whose chief executive, Eric E. Schmidt, called his counterpart at Yahoo, Jerry Yang, to offer his company’s help in keeping Yahoo independent after Microsoft’s bid. The two companies discussed the possibility of Yahoo’s outsourcing its search-related ad business to Google, according to people briefed on the talks.

Many analysts believe that such a deal would generate more revenue for Yahoo because Google’s advertising technology generates more cash for every search query, on average, than Yahoo’s own technology. It would also produce substantial savings, as Yahoo could scrap its sizable engineering dedicated to search advertising.

This option had long been recommended by some Yahoo investors and analysts, but Yahoo executives had rejected it. They began considering it anew as a way to remain independent after Microsoft’s bid. But while talks between the two companies are not dead, many analysts and some Yahoo shareholders said that a deal was unlikely, in part because of antitrust concerns.

Meanwhile, two Time Warner executives confirmed that Yahoo has also proposed some sort of combination of Yahoo and AOL, but said that Jeffrey L. Bewkes, Time Warner’s new chief executive, is not likely to agree to such a deal. After the disastrous AOL-Time Warner merger, Mr. Bewkes is wary of big deals with Internet companies, one of the executives said.

Partnerships between Yahoo and MySpace or AOL could be complicated because Google is a leading seller of ads on both of those properties and owns 5 percent of AOL.

Google and Time Warner declined to comment for this article.

The narrowing of Yahoo’s options comes as some large shareholders are beginning to favor a deal with Microsoft — as long as Microsoft raises its price a bit.

On Wednesday, Bill Miller, a well-known portfolio manager at Legg Mason, which is Yahoo’s second-largest shareholder after Capital Research and Management, said he favored a deal with Microsoft, albeit at a higher price. Mr. Miller said that it would be hard for Yahoo to come up with alternatives that deliver more value than Microsoft would be willing to pay.

A person representing another large Yahoo shareholder said Wednesday that a deal with Microsoft appeared to be the only practical alternative for Yahoo.

“Both the AOL and News Corp. guys have been talking for the last year about the potential of merging AOL into Yahoo or MySpace into Yahoo,” the person said. “But it is too late. They blew it by not acting earlier.”

On Monday, Yahoo officially rejected Microsoft’s buyout offer, saying it was too low. The offer, a mix of cash and stock, was initially priced at $44.6 billion. After decline in Microsoft’s share price, it is now valued at $42.1 billion.

Microsoft vowed to press on with its bid, calling it “full and fair.” It has hired Innisfree M&A, a proxy solicitation firm, in preparation for a possible proxy fight to oust Yahoo’s board.

The person representing the large Yahoo shareholder predicted that Yahoo would soon begin negotiating a deal with Microsoft, and that the two would clinch a deal at a slightly higher price. “All this dancing around with partners will be quickly exhausted,” the person said.

On Wednesday, Microsoft said in a statement: “We are confident that moving forward promptly to consummate a transaction is in the best interests of all parties.”

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