Yahoo Plays the Field with News Corp.
News Corp. may be trying to cut in on the mating dance between Microsoft and Yahoo!, but it may only succeed in tightening the software maker's embrace.
Yahoo (YHOO) and News Corp. (NWS) are discussing a deal that would involve mixing Yahoo's businesses with News Corp. Internet properties, including the popular social network MySpace, according to newspapers and blogs including Silicon Alley Insider. As part of the complicated deal, News Corp. and a private equity firm would buy a significant piece of Yahoo, as much as 20%, allowing Yahoo to remain independent. Google (GOOG) may also play a role, according to some accounts, possibly handling Web search and related advertising for Yahoo. It's unclear how much the deal would value Yahoo, though it's certainly above the $42 billion that Microsoft's cash-and-stock offer is now worth.
The point of all these machinations would be to provide an alternative to the unwelcome advances of Microsoft (MSFT). Yahoo's board rejected Microsoft's Jan. 31 bid, saying it "significantly undervalues" the company. Microsoft says its offer is "full and fair," a suggestion it's disinclined to sweeten the terms absent a rival offer. The company has also held out the prospect of making a direct appeal to Yahoo shareholders.
Skeptics Dismiss It as a "Fanciful Rumor"
But how seriously should Microsoft take the News Corp. discussions? The talks are more likely to result in a sweetened—and increasingly irresistible—offer from Microsoft, than in any credible deal between News Corp. and Yahoo. "The other combinations [besides Microsoft] don't make any sense," says N. Venkat Venkatraman, a management professor at Boston University.
One of the biggest impediments to the talks is the role Google would play. Google already has a multiyear, $900 million agreement to handle advertising for MySpace. Any deal that brings Google and Yahoo into the same orbit would undoubtedly raise the hackles of regulators concerned about the antitrust implications of pairing the No. 1 and No. 2 players in online advertising. What's more, the financing of such a deal is unclear, at best. At a time when credit is tight, private equity could find it difficult to raise the funds necessary to pull off the deal. Yahoo declined to comment on the reports.
Many analysts are skeptical of the prospects of a News Corp.-Yahoo combination. "It's still at the fanciful rumor stage," says Jeffrey Lindsay, an analyst with Sanford C. Bernstein & Co. "We couldn't make the numbers add up. We don't feel it looks credible." UBS (UBS) Investment Research's Internet analyst Benjamin Schachter also has a hard time believing the News Corp. deal could get done, and expects Microsoft to eventually increase its bid.
The Social Possibilities Are Del.icio.us
Publicly, News Corp. has played coy over its intentions concerning Yahoo. "I think that day has passed, but you never know," News Corp. Chairman Rupert Murdoch said Feb. 4. Murdoch, who recently succeeded in acquiring Dow Jones & Co. despite the target's initial resistance, has no interest in seeing Microsoft, a sometime rival in the online world, walk away with Yahoo on the cheap.
Indeed, Yahoo has plenty to gain from MySpace. Yahoo's own efforts in social networking have largely fizzled. MySpace has grown into the largest social networking site with nearly 110 million users worldwide, according to its latest internal figures. The social network is projected to pull in more than 54% of the $1.5 billion expected to go to U.S. social network advertising in 2008, according to research firm eMarketer. "I could see Yahoo getting something valuable out of having MySpace as part of its portfolio," says eMarketer senior analyst Debra Aho Williamson.
But what can MySpace gain from Yahoo? Over the past several years, Yahoo has acquired several promising social Web properties, including the Flickr photo-sharing site that could make MySpace a more engaging destination while helping driving traffic back to Yahoo. MySpace users, for example, could use Flickr photos to decorate their pages and share their own photos with friends. MySpace users could potentially also share news and interesting links through a partnership with Yahoo News and its social bookmarking site Del.icio.us.
Of course, merging Yahoo's social media properties with MySpace poses some of the same tricky integration problems Microsoft would face if it were to acquire the company. MySpace, after all, acquired its own photo-sharing site Photobucket for $300 million last may. "It gets messy when you get into the nitty-gritty of what MySpace owns and what News Corp. owns," says Williamson.
Still, Yahoo directors have a fiduciary duty to get the best offer for shareholders, even if it means trying to cobble together a messy deal with News Corp.