Despite Yahoo’s rejection of a new search deal offer from Microsoft last week—one that went over like the proverbial turd in the punchbowl with some shareholders—the software giant this time is leaving its walking shoes in the closet. A number of sources indicate that despite twice walking away from previous deals for all of Yahoo and then its search operations, it’s not yet giving up on the possibility of a deal with Yahoo before its much-anticipated annual meeting on Aug. 1.
In the last couple of days, people from Microsoft have been busily dialing up Yahoo shareholders. The goal is partly to do damage control on the latest search deal. Its terms as relayed by Yahoo (and subsequently denied by Microsoft), such as a 24-hour deadline and a requirement that Yahoo’s board be replaced, struck many people as poorly conceived and delivered. Microsoft aimed to explain how the deal was much-improved over the last one, which Yahoo also rejected, and how the value of the deal’s revenue-sharing, equity, and loan provisions, plus Yahoo's current stock price, added up to $33 a share, same as Microsoft’s last Yahoo buyout offer.
But most interesting, one shareholder says Microsoft also asked for suggestions on how to improve its offer. “We think Microsoft wants it,” says this person, who disliked the complexity of the multi-part deal and didn’t think it was worth Microsoft’s imputed value. “They’re picking up the phone and talking to people. It doesn't strike me as the behavior of a company that's walking away," says this person, who might be swayed by a considerably larger cash component and less other baggage, such as the loan. This person’s guess: “They’ll come back with another offer.”
Another shareholder, who is long past weary of the antics of all sides--the phrase “nut jobs” actually came up in the conversation--says the takeaway from Microsoft’s latest search offer was that “Microsoft is in the game. They’re obviously still working very hard on something.”
Microsoft won’t comment on what it plans to do next, though sources close to the company say Microsoft would be open to changing the equity part of the offer. And there’s no certainty, of course-—of course! This is Microsoft and Yahoo, after all-—that Microsoft will come back with a significantly different deal, or another deal at all. I’m told that much of Microsoft’s overtures of the last two days to Yahoo shareholders is “reputational.” In other words, Microsoft’s trying to recover the high ground it clearly lost with an Icahn-influenced deal that, by a number of people’s reckoning, Yahoo’s board could not have accepted.
Still, despite the bad blood, I wouldn’t be surprised to see Microsoft return with another version of the search deal, because Yahoo is really its only chance to chip away at Google’s dominant position. People close to Yahoo say that although the company may prefer a buyout offer, it’s open to a workable search deal with Microsoft.
But at this point, Yahoo may be even more reluctant, if that’s possible, to consider anything but an indisputably great deal that would trump the inevitable complexity of a search deal. People close to Yahoo's thinking believe that unlike a buyout, which would be a simpler proposition, a search deal probably can’t be hammered out before Aug. 1. And Yahoo at this point isn’t inclined to delay the annual meeting once again—especially since sentiment lately has been turning its way for the first time in a long time.
The other challenge for Microsoft is that many shareholders still wish it would return with its last, since-abandoned $33-a-share offer to buy all of Yahoo—something that all signs for now indicate Microsoft has little desire to revisit. “I’m not interested in a complex deal,” says small Yahoo shareholder Eric Jackson, whose campaign against former Yahoo CEO Terry Semel last year drew a lot of attention. “I would like to see a full-out acquisition, and I think that’s the dominant view of most shareholders.”
Absent a buyout, then, it’s clear that shareholders will want a slam dunk of a good search deal. And maybe Yahoo, under fire Tuesday by folks in Congress for its search deal with Google, might even finally accept it. Stranger things have happened.
And what about Icahn? While some people like Henry Blodget think he has already lost the proxy fight, I think it's still early to write off his dissident slate. If he manages to keep working with Microsoft on a deal more palatable to all concerned, or comes up with a decent new CEO candidate to replace Yahoo CEO Jerry Yang, as he has vowed to do, he might win the backing of enough shareholders, no small number of whom have little confidence in Yahoo's board or management by now.
But neither Icahn nor Yang nor Microsoft CEO Steve Ballmer wants to let it come down to a shareholder vote, whose outcome is far from certain for either side. So, bottom line: Expect more dealmaking in coming days and weeks.