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The Dance Will Go On

Written By Drupad Sil | May 19, 2008 | Share This | Print This Post

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The big news this morning is (surprise surprise) Microsoft’s return to the bargaining table in its bid for some or all of Yahoo. The “some” part represents Yahoo’s search advertising business, which when acquired by or partnered with Microsoft would certainly help Microsoft capture more market share, although still be a far cry from a short-term threat to Google. Indeed, even a full-out acquisition of Yahoo by Microsoft would not be a short-term threat to Google’s domination of the search marketplace, though it would obviously drastically change the landscape and long-term outlook, assuming it survives anti-trust scrutiny. Microsoft issued a statement on Sunday on its return to negotiations:

“Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or Microsoft or other third parties.

There of course can be no assurance that any transaction will result from these discussions.”

Aside from the wincing done by Yahoo shareholders at that last line (ah, $33 a share, we hardly knew ye) the statement, while a reversal from Microsoft’s earlier stated position of having “moved on” from its takeover bid, raises the possibility of a competing partnership offer to the Google-Yahoo alliance said to be in the works and announced as early as this week. Yahoo has not rejected the possibility out of hand, as it released a statement of its own on Sunday:

“Yahoo! has confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo! at this time. Yahoo! and its Board of Directors continue to consider a number of value maximizing strategic alternatives for Yahoo!, and we remain open to pursuing any transaction which is in the best interest of our stockholders. Yahoo!’s Board of Directors will evaluate each of our alternatives, including any Microsoft proposal, consistent with its fiduciary duties, with a focus on maximizing stockholder value.”

It’s a bland statement with little information, but at least shareholders know that Yahoo’s board will not slam the door on new negotiations with Microsoft (at least immediately, anyway). Indeed, the longer the talks are in limbo, the longer shareholders can enjoy holding Yahoo shares that are at a decent premium over where they were before Microsoft floated its acquisition idea. Originally trading at $19.18 back in late January, Yahoo’s shares closed at $27.66 on Friday, still at a 44% premium despite a large drop the day Microsoft pulled out of talks. Some of this is no doubt due to Carl Icahn and his push to appoint a new board more inclined to be bought by Microsoft, but I think a sizable portion of shareholders felt that despite Microsoft’s vibe of finality on the talks the software giant would return to negotiations at some point. We certainly felt the same way, thought not expecting to happen this quickly. At the time of publication, Yahoo shares are already trading up about 1.5% in pre-market buying, showing that some cautious optimism is being priced in by investors. Some commentary on the deal from the Wall Street Journal:

“While Microsoft’s statement leaves the door open to cooperating with other investors, the company still hasn’t had contact with Mr. Icahn or his team, according to a person familiar with the matter. Still, by not ruling out the possibility of cooperation with other investors, Microsoft has signaled that option could be revisited.

By floating a search pact now, Microsoft is making a defensive move. Yahoo has already held extensive talks about a search-ad partnership with Google, and an agreement between those two companies is close, according to people close to Yahoo. Such a deal would probably preclude cooperation between Yahoo and Microsoft.”

While there hasn’t been any official direct contact between Microsoft and Icahn, Microsoft’s letter outlining the details of its courtship of Yahoo was certainly released with the intention of spurring some shareholder activism. It seems to have delivered. Whatever happens, the conclusion is still the same: Yahoo has lost much of the initiative it had in the search marketplace, and Google and Microsoft are basically toying with the company until a deal manages to hold. Then we can expect some serious anti-trust roadblocks placed by whichever company was left out in the cold. Fun times.

Topics: Advertising: Online, Google, Investment, M&A, Microsoft, Yahoo! |

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