Volume 6, Number 20 -- May 21, 2008

Micro-Hoo is Back On the Table, But In a Different Form

Published: May 21, 2008

by Alex Woodie

Spurred by an activist billionaire investor's participation in Yahoo's affairs and his attempt to revive the $47 billion deal, Microsoft is taking a second look at acquiring Yahoo, or at least a part of it. On Sunday, the software giant announced that it's back in talks with Yahoo to do some kind of deal. While Microsoft isn't talking specifics, the deal reportedly involves Yahoo selling its search and online advertising business to Microsoft for about $20 billion, while other Yahoo's assets would be sold off.

Just two weeks ago, any deal between Microsoft and Yahoo was dead, talks were over, and the two sides tried their best to move on and get back to business as usual after a bruising, three-month ordeal.

Then last Thursday, Carl Icahn entered into the picture. Icahn, the polarizing billionaire financier who has developed a fearsome reputation as a corporate raider and activist investor, bought 59 million shares of Yahoo (worth about $1 billion), announced his intention to force Yahoo back to the bargaining table via threat of a proxy battle, and submitted his nominees for Yahoo's upcoming board of directors election, which is scheduled for July 3 at Yahoo's annual meeting.

Taking the cue from Icahn, Microsoft suddenly had fresh legs to do some sort of deal. "In light of developments," the software giant stated in a press release on its Web site, "Microsoft announced that it is continuing to explore and pursue its alternatives" in regard to a deal with Yahoo.

What kind of alternatives? Microsoft answered that question with measured vagueness. "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 discussions with shareholders of Yahoo or Microsoft or with other third parties."

Microsoft won't talk turkey, but according to the The Wall Street Journal, which cited anonymous sources close to the companies, the deal would involve Yahoo selling its search and online advertising business to Microsoft. Yahoo would also sell its Asian assets, and Microsoft would acquire a minority stake in what remained of the company.

Yahoo's search and advertising business is worth about $20 billion, according a Journal source, while Yahoo's Asian assets would garner about $10 billion on the market, which could go back to shareholders through stock buybacks or dividends, the Journal says.

The potential deal raised some eyebrows. If Yahoo wouldn't sell the entire company to Microsoft for $47 billion (CEO Jerry Yang held out for $53 billion, which Microsoft would not do.), then why would Yahoo agree to sell its most prized possessions, its Internet search engine--which was only recently eclipsed by Google in terms of volume--and its online advertising business, which is a distant second to Google?

Yahoo may not have much of a choice in completing some sort of deal with Microsoft, especially considering its mounting troubles with shareholder lawsuits and the new revolt spurred by Icahn.

While Icahn doesn't own enough of Yahoo to cause much damage yet, that could quickly change, as he is seeking SEC clearance to sink billions more into Yahoo to force the issue. Icahn also has the backing of some of the biggest independent Yahoo shareholders, which could give him a voting block rivaling Yahoo co-founders Yang and David Filo, who together own about 134 million shares, or about 10 percent of the company.

With the threat of a proxy fight for control of Yahoo renewed, a deal could be completed as soon as the end of this week, according to reports. Or the matter could just die. Again.

"There, of course, can be no assurance that any transaction will result from these discussions," Microsoft said, just in case there wasn't enough uncertainty about the deal.

At this point, uncertainty is the only thing that's certain about this deal.


Microsoft Withdraws Yahoo Bid, Won't Go Hostile

Micro-Hoo: Where Does It Stand Now?

Ballmer Downplays Yahoo's Financial Results

More Wheeling, But No Dealing in Micro-Hoo

Yahoo Rebuffs Microsoft's Threat of a Hostile Takeover

Microsoft Won't Raise Its Yahoo Offer

Yahoo Moves to Block Proxy Battle in Microsoft Takeover Bid

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Editor: Alex Woodie
Contributing Editors: Dan Burger, Joe Hertvik,
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