As Pressure Mounts on Yahoo, Microsoft Eyes New Tie-up

With Yahoo facing pressure from a corporate raider, the internet giant has reopened discussions on a tie-up with Microsoft, but for a new deal that would probably not be an outright takeover.

The two firms said over the weekend that they were exploring new options two weeks after Microsoft withdrew its offer to acquire the struggling internet pioneer.

The news came after last week’s announcement by billionaire Carl Icahn that he had acquired a big stake in Yahoo and would seek to unseat its board in an effort to reopen merger talks with Microsoft, which Icahn said had been “completely botched.”

“If I was Carl Icahn, I would be selling today,” Canaccord Adams analyst Colin Gillis said.

Microsoft said in a statement on Sunday that in light of developments since it backed out of takeover talks, the software giant “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,” it said.

Microsoft offered to buy Yahoo for US$44.6 billion in stock and cash on January 31, but withdrew the offer on May 3, saying Yahoo refused to budge despite the software giant upping its offer to nearly $50 billion.

Yahoo said in a separate statement that it has confirmed with Microsoft “that it is not interested in pursuing an acquisition of all of Yahoo at this time.”

What might be on Microsoft’s mind is a trial-run Yahoo did last month with Google, letting the internet search colossus handle advertising posted with Yahoo search results.

Google’s money-making methods proved superior to Yahoo’s recently launched Panama advertising platform.

“I think Microsoft realized Yahoo was willing to do a deal like this with Google and let them know they would do the same kind of deal,” said Silicon Valley analyst Rob Enderle.

“It gives Microsoft what they wanted, market share, without the aggravation of an acquisition.”

Alliance talks with Microsoft “muddy the waters” for Icahn by giving Yahoo shareholders more confidence that the current board of directors has a grip on the situation, according to Enderle.

By voting in an Icahn slate of directors with a mandate to sell to Microsoft, Yahoo shareholders would put the firm in a weak bargaining position, Gillis said.

“All those thinking that this means a shotgun marriage is going to work, I don’t think that,” Gillis said.

Yahoo said its board members “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.”

Greg Sterling, analyst at Search Engine Land, said the tie-up could bring together Yahoo’s and Microsoft’s internet search and advertising operations in an effort to take on sector leader Google.

Jeffrey Ham at said the two firms have an interest in joining forces to take on Google.

“Microsoft’s interest in improving and expanding its online and advertising business reflects its commitment to challenging Google for market share,” he said.

“If Microsoft can obtain the specific assets it was seeking all along, without the headache of completely merging operations and culture, it may find itself better positioned in the long run.”

Icahn said in an open letter last Thursday that Yahoo’s board bungled merger talks with Microsoft and that he is amassing Yahoo stock to oust the board of directors at an annual shareholders meeting on July 3.

Microsoft’s initial takeover bid unveiled in February was aimed at merging online resources to better compete with Google, which has been gobbling up an increasing share of the lucrative search market.

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