[Posted on April 10, 2008 - 5:30 PM]
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DiggWhat has been up until recently a fairly straightforward pursuit of one company (Yahoo! Inc.) that does not want to be acquired by another (Microsoft Corp.) has now taken enough twists and turns to be a Hitchcock movie.
Breaking the situation down to its simplest form, Yahoo!, after announcing late Wednesday that it would begin a trial partnership with rival Google Inc. to outsource its search business, is now reportedly seeking to merge with Time-Warner Inc.'s AOL unit in a deal that would give Time-Warner 20% of the combined entity. Microsoft, meanwhile, may be looking to team with News Corp. on a bid for Yahoo! that would also involve News Corp.'s MySpace social networking property.
The latest maneuvers add drama to a showdown that appeared to be nearing an end after Microsoft on April 5 gave Yahoo! three weeks to reach an agreement on a deal, threatening a proxy fight for control of the Sunnyvale, Calif.-based company's board of directors.
"Yahoo! is turning over every rock possible to deflect trying to become a part of Microsoft, but its options are few and far between, and none can unlock shareholder value the way selling itself to Microsoft could," said Fred Moran, an analyst with Stanford Equity Research.
There also are signs that Microsoft is scrambling. Reports that the Redmond, Wash.-based company could be looking to team with News Corp. in a mega-deal involving MySpace and Yahoo! suggests Microsoft is worried about losing its quarry. But Microsoft may want to be careful about pursuing a deal with News Corp. chairman and CEO Rupert Murdoch, who has a reputation for striking deals that wind up benefiting his company at someone else's expense.
"News Corp.'s presence in the transaction perhaps should raise a red flag in terms of the way Microsoft is testing the market," said Adam Lehman, a former senior vice president of business affairs and development at AOL and current head of Rock Ridge Ventures, an investment and advisory firm focused on digital media. "News Corp. has a very strong record of getting in and out of the market at the right time. To the extent a deal involves them flipping out of MySpace at a significant multiple of what it originally bought it for should raise questions in Redmond."
Yahoo!'s potential plan with AOL, floated in published reports Thursday, would call for New York-based Time-Warner to inject an unspecified amount of money in the entity and for Yahoo! to spend a few billion dollars buying back some of its stock for anywhere from $30 to $40 a share. The deal would value AOL's ad business at roughly $10 billion.
But sentiment among those who have followed the saga since Microsoft first announced its Yahoo! offer, which is currently valued at about $29.36 per share or $41.25 billion, appears split between those who think the latest actions give Yahoo! more leverage to exact a higher price from Microsoft and those who believe Yahoo! could still avoid the dreaded buyout.
Jefferies & Co. analyst Yousef Squali argued that a combination of the No. 1 and No. 4 players in online display advertising would create an entity "with tremendous scale and reach," but notes that duplicate platforms would "complicate the integration." Squali concludes that the structure of a Yahoo!-AOL deal "will likely be less appealing to Yahoo! shareholders than the straightforward Microsoft bid," though it could force Microsoft to raise its bid "at least to a level that matches its initial $31 bid."
Citigroup Inc. analyst Mark Mahaney said he still views an acquisition of Yahoo! by Microsoft as "the most likely outcome," though at a higher price than the initial $31-a-share bid, due to the latest developments. In a research note, Mahaney wrote that either a combined News Corp.-Microsoft bid or an AOL-Yahoo! strategic deal that involves a share repurchase at a higher price than $31 "very likely forces a higher bid" from Microsoft, while a full outsourcing deal with Google "almost certainly forces a higher bid." He maintains a $34 price target on Yahoo!.
Sanford C. Bernstein analyst Jeffrey Lindsay argued that if the terms being floated in the published reports are accurate, a combined Yahoo!-AOL could be a better option for shareholders than the Microsoft offer. Lindsay said analysis of a potential combination of the two companies he did in February showed a deal could have worked to the advantage of Yahoo! shareholders then, even though the terms being floated were not as favorable for Yahoo! as they may be today. At that time, he said, AOL was valued closer to $15 billion or $16 billion, with a heavy cash component.
Since then, however, AOL's results have deteriorated, so Lindsay said determining the benefits of the deal now would require more details on the terms of any potential transaction and AOL's financial performance.
Lindsay also said he doubts Yahoo!'s plan to outsource its search results to Google will fly. The two companies announced on Wednesday they had entered into an agreement to deliver Google ads next to Yahoo!'s search results during a two-week trial period. That trial period just happens to conclude right before Microsoft's three-week deadline ends.
"Unfortunately, now that Microsoft has jumped into the fray, it probably was too late for Yahoo! to get together with Google because Microsoft will pull out all the stops to cry foul and muck it up with the regulators, which is what they're already doing."
In his note, Squali projected that outsourcing its search business would give Yahoo!'s results a short-term boost, adding $800 million to $900 million in fiscal 2009 revenues and at least $650 million to $750 million to Ebitda (a 30% increase). But the deal also weakens Yahoo!'s strategic position, taking it, for the most part, out of the search game, "leaving the playing field wide open for Google to dominate," and forcing it to face regulatory hurdles he described as "daunting."
Microsoft on Wednesday said such an agreement would consolidate more than 90% of the search advertising market in Google's hands, though Lindsay said Microsoft is defining the online advertising market too narrowly with that number. Lindsay said if the entire online advertising market is taken into account, including display advertising both in the U.S. and internationally, Google would only have around a 32% share.
But he added that an agreement with Google could also be detrimental for Microsoft because regulatory scrutiny of such a deal could take a year to play out, delaying its pursuit of Yahoo!, which he said could "drag into 2010" if it must also go through the regulatory process.
Shares of Yahoo! were up 2.6% at $28.48 late in Thursday's session. Shares of Microsoft were up .7% at $29.09, while Time-Warner was up 1.2% at $14.59. --David Shabelman
