Microsoft puts new Yahoo deal on the table

Microsoft said on Sunday that it has raised the possibility of a new deal with Yahoo, one that may involve buying a part of the company but not all of it.

“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 said in a brief statement.

The company did not elaborate on the proposal. It said it did not plan at this time to make a new bid to acquire all of Yahoo, but that it was continuing to explore its options to expand its online services and advertising businesses.

Microsoft withdrew its offer to buy Yahoo on May 3 after the two sides failed to agree on a price. Since then, the activist investor Carl Icahn has said he will launch a proxy battle to replace Yahoo’s board and force it back to the negotiating table with Microsoft.

Microsoft could not immediately be reached for comment, although published reports said the company is not discussing its plan further in public. “There of course can be no assurance that any transaction will result from these discussions,” Microsoft said in its statement. It said it reserved the right to reconsider its decision not to buy Yahoo outright, depending on any future talks with Yahoo, third parties or the shareholders of either company.

Meanwhile, Yahoo issued a statement later on Sunday confirming that Microsoft isn’t at this time interested in acquiring the entire company.

“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,” the statement said. “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.”

That Microsoft is discussing a new deal could be a sign that Yahoo’s leadership wants to avoid the spectacle of a proxy battle ahead of its annual meeting on July 3, the Wall Street Journal reported.

Yahoo responded to Icahn’s threats on Friday, arguing that its own board gave Microsoft’s offer fair consideration, and that the current board, led by Chairman Roy Bostock, can best manage Yahoo’s future.

It was unclear Sunday what type of alternative deal Microsoft has in mind. It said it issued its statement “in light of developments” that have taken place since it withdrew its offer.

Microsoft indicated earlier that it had moved on from the deal and that it was looking for other ways to grow its online business, internally or through smaller acquisitions.

Search advertising continues to be the largest segment of online advertising and is the fuel that has propelled Google’s revenue and profits to levels that have made Microsoft green with envy. “There’s got to be some search component to the deal,” said industry analyst Greg Sterling of Sterling Market Intelligence.

What shape the tie-up might take is anyone’s guess. It could be some sort of joint venture in which the companies pool assets and create a larger ad network, Sterling said. Or it could be an agreement for Yahoo to outsource part of its search advertising business to Microsoft, along the lines of what Yahoo has reportedly been negotiating for weeks with Google, he said.

What’s clear is that since Microsoft withdrew its offer to buy Yahoo for $33 per share on May 3, Yahoo’s management and board have been bombarded with complaints from shareholders.

Last week, billionaire investor Carl Icahn turned up the heat even more when he put forth a slate of 10 candidates and announced his intention to launch a proxy fight to oust Yahoo’s board at the company’s shareholders meeting in July, and strike an acquisition deal with Microsoft.

“Yahoo is under pressure to show shareholders some deal, probably with Google but maybe not just with Google, to give them some assurance of value on the immediate term,” he said. Of course, it’s not great news for Yahoo shareholders that Microsoft is now only interested in doing a limited, narrow deal with Yahoo, said Brian Bolan, research director at Jackson Securities.

To Bolan, it seems evident that Microsoft has rethought its plan to buy all of Yahoo. “The clear indication of this is that Microsoft has looked through this soup-to-nuts and it has realized there’s only a couple of parts of Yahoo that they really want. They don’t want to duplicate services and features much in the way Yahoo has done over the years within its own properties,” Bolan said.

One thing Microsoft does want and need is better search technology and better search monetization, so it’s likely that Microsoft is eyeing Yahoo’s assets in this specific area. But whatever form the deal takes, it will not be worth anywhere near what Microsoft had been ready to pay to acquire Yahoo, he said.

Consequently, Bolan expects Yahoo’s stock to take a significant hit on Monday, as disappointed investors react to Microsoft’s statement that it’s not currently interested in a full-blown acquisition. “That’s going to take a lot of the M&A [merger and acquisition] premium out of the stock,” Bolan said.

“The stock has been running up on the idea of a bunch of people buying shares to try to force this [Microsoft acquisition] deal, to try to make this happen,” he added.

A limited deal with Microsoft means that Icahn will likely push ahead with his proxy fight, so that with control of the board, he can carve out an acquisition deal, which at that point will likely be for somewhere at or a bit above the mid-$20 per share range, Bolan said. And if no acquisition deal materializes for Yahoo, its stock will likely fall apart, said Bolan, who currently has a “sell” recommendation and a $17 price target on the stock.

Microsoft announced its $44.6 billion cash-and-stock bid for Yahoo on Feb. 1, but abandoned its three-month courtship on May 3, saying that Yahoo had rejected a revised offer for $33 per share, an increase of about $5 billion. Yahoo formally rejected Microsoft’s original offer on Feb. 11, saying it undervalued the company.

Yahoo’s stock closed at $19.18 per share on the day before the initial Microsoft offer, which boosted it to almost $30. However, on Monday, May 5, the first day of trading after Microsoft’s offer withdrawal, Yahoo’s stock closed down 15 percent at $24.37, after dropping as low as $22.97 during the day.

Not surprisingly, various large Yahoo shareholders have expressed their displeasure with Yahoo’s board and management for, in their view, not negotiating in good faith with Microsoft and causing the talks to collapse.

Yahoo co-founder and CEO Jerry Yang and other top Yahoo executives have since then tried to shift the blame to Microsoft, alleging that the $33-per-share offer was never put in writing and that Microsoft unexpectedly walked away at a time when Yahoo was still open to negotiating.

At the same time, Yang has failed to seal a deal in which Yahoo would outsource part of its search advertising business to Google, a move that could give Yahoo a significant revenue boost. Those negotiations with Google were cited by Microsoft CEO Steve Ballmer as a major reason to withdraw the offer because, in Ballmer’s view, outsourcing search ads to Google would weaken Yahoo’s competitive position in online advertising.

After Microsoft withdrew its offer, its top officials have repeatedly said that the company is no longer interested in acquiring Yahoo, arguing that Microsoft can strengthen its Internet business via internal efforts. On Sunday, Microsoft reiterated that it “is not proposing to make a new bid to acquire all of Yahoo at this time.” However, Microsoft did add that it “reserves the right to reconsider that alternative.”

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