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Yahoo Turns To Google As Talks With Microsoft Collapse

Posted on: Thursday, 12 June 2008, 19:25 CDT

After months of often-contentious negotiations, efforts to revive a failed takeover of Yahoo Inc by Microsoft Corp have finally ended, according to separate statements disclosed Thursday by the two companies.  

The statements suggested a more permanent rift between the firms, and triggered a selloff of Yahoo’s stock that drove its share price down 10 percent. The drop took the stock to its lowest level since January 31, the day before Microsoft made its initial takeover bid, as investors abandoned any hope of a deal.  The news comes at a particularly bad time for Yahoo’s board of directors, and increases pressure on the company to provide an alternative strategy.

With Microsoft seemingly out of the picture, Yahoo is instead turning to Internet giant Google Inc. to help boost its revenue. The company is expected to announce that it will allow Google to sell ads displayed alongside search results on its Web site. Yahoo called the move an $800 million annual revenue opportunity that would boost cash flow by $250 million to $450 million within a year.  

Google has previously demonstrated its technology could generate higher revenue than Yahoo's own system during a two-week trial that ended in April of this year. The company said both its own ads and Google's would compete in an auction style process that could make a deal easier to pass regulatory approval.

"Yahoo is being a reseller of Google whenever it makes sense and that is likely to be a lot of the time given how much more effective Google Web search ads have proven to be," Global Crown Capital analyst Martin Pyykkonen told Reuters.

Most expect the deal to face a rigorous antitrust review considering Google’s industry position. Senator Herb Kohl (D-WI), chairman of the U.S. Senate antitrust subcommittee, said the committee would investigate the deal.

For more than a year, Microsoft had sought a takeover of Yahoo, offering to pay $47.5 billion, or $33 per share, to acquire the company.

The latest offer included acquiring Yahoo's search business and offered $35 per share for a 16 percent company stake, according to a Reuters report quoting two sources briefed on the deal but not authorized to speak publicly about the matter.

After the talks collapsed, Yahoo shares fell to $23.52 but later rose to $24.00 in after-hours trading on news of the company’s deal with Google.  

Microsoft had hoped an acquisition of Yahoo would allow it to more rapidly capitalize on the growth of Web advertising and better position the company to compete with Google.

On Thursday, Yahoo said Microsoft had made it clear during a June 8 meeting that company was no longer interested in buying Yahoo outright, even at the most recently proposed price of $33 per share.

The news may not be enough to satisfy some of Yahoo’s shareholders, including billionaire Carl Icahn, who had been pushing for a deal with Microsoft and even called for the ouster of Yahoo CEO Jerry Yang.

But Microsoft said it would not "rebid" for all of Yahoo, news that sent its shares up more than 4 percent. Yahoo said Thursday that an alternative Microsoft bid to acquire only its search business did not align with Yahoo’s strategy to grow search and display advertising.

In it’s company statement, Microsoft said its alternative offer was still open for discussion, and that its most recent talks for a partial deal would have valued Yahoo at more than $33 per share.

But analysts do not expect the two firms to revive another round of discussions.

"It certainly seems to be the end," said Derek Brown, an analyst at Cantor Fitzgerald, told Reuters.

"In their most recent discussions, they were talking about totally separate visions of both a deal and the future."

Microsoft is expected to target other firms for acquisition since the company has not abandoned its online advertising goals.

"Microsoft will keep trying," Morningstar analyst Toan Tran told Reuters.

"Yahoo is one of most popular sites on the Web and there is no one else with as much traffic. AOL may be one option and it may not be as expensive."

Icahn has waged a proxy battle to remove Yahoo's board at its upcoming August 1 annual meeting, calling on the company to secure a higher price from Microsoft.  The partnership with Google should only be a second choice, he said.

Numerous news reports have said Icahn could not be reached for comment.

Shares of Google closed at $552.95, up $7.75, while Microsoft shares closed up $1.12 at $28.24.

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On the Net:

www.microsoft.com

www.yahoo.com

Source: redOrbit Staff and Wire Reports

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