Microsoft-Yahoo: The Lingering Saga
How quickly things change. Just two months ago, Microsoft (MSFT) seemed desperate to gobble up Yahoo! (YHOO) whole, offering to buy the entire Internet company for $33 a share, or a total of $47.5 billion. Not enough, Yahoo Chief Executive Jerry Yang said back in early May (BusinessWeek.com, 5/3/08). Since then, intense shareholder pressure has led Yang and Yahoo's board to make stronger overtures toward Microsoft for a deal. The company approached Microsoft a few weeks later about resuming negotiations, going so far as to say that the company would be willing to sell itself for something close to what Microsoft had offered, sources say. This time, though, it was Microsoft CEO Steve Ballmer who walked away.
How could Ballmer change his mind so quickly? The CEO told BusinessWeek last February that combining Microsoft and Yahoo would "bring together critical mass" to better attract advertisers to its Web search and display business and possibly come close to rivaling Google's (BusinessWeek.com, 2/1/08). If anything, Google has extended its lead over Microsoft and Yahoo in the subsequent months. According to Nielsen Online, Google's share climbed from 56.9% of U.S. search queries in January to 59.3% in May.
Even as Google (GOOG) has gotten stronger, Ballmer believes a deal to buy all of Yahoo has gotten riskier. First, the regulatory equation is much more complex now than it was back at the beginning of the year. Microsoft figured that winning regulatory approval for a deal this large would take at least six months. Had Yahoo agreed by early May, Microsoft could have hoped to clear regulatory hurdles before a new administration took over the Justice Dept. Striking a deal now would likely mean waiting for a new regime in Washington, adding months and a greater degree of uncertainty to the process. That delay at the very least reduces the value of Yahoo, since Microsoft would have to wait to capitalize on the strength of a combined entity.
What's more, sources say Microsoft believes Yahoo's business has deteriorated since it first proposed buying the company. Its first-quarter results, in which the company likely put its best face forward, only slightly beat analyst expectations (BusinessWeek.com, 4/23/08), not enough to inspire shareholder confidence. Since then, a handful of key executives have left (BusinessWeek.com, 6/19/08). "Attrition is going to be a huge issue for them," says Forrester Research (FORR) analyst Charlene Li. "They have to hang on to employees in a very competitive market."
Finally, Ballmer and his coterie of finance and Web executives found Yang and his group less than enthusiastic about combining companies. "Yahoo management has done nothing but put up roadblocks," says Robert Breza, an analyst with RBC Capital Markets. That would clearly have hampered finalizing a deal, let alone putting together operations had a deal been concluded.
Other Plays Involving Media Companies
Still, Ballmer hasn't walked away from Yahoo entirely. Microsoft continues to hold out hope that it could acquire just a piece of Yahoo—the company's valuable search business. The Wall Street Journal reported July 2 that Microsoft has held discussions with Time Warner (TWX) and News Corp. (NWS), among others, to measure their interest in putting up the money for the remaining pieces of Yahoo. While Microsoft could add Yahoo's search business to its own to gain scale closer to that of Google's, the media companies could acquire popular online properties from Yahoo, such as its finance and sports sites. That kind of deal was discussed and dismissed earlier in the takeover drama this year, however, and it seems unlikely at this point. "It's no secret we've looked for ways to collaborate with Yahoo and others in the industry," says a source familiar with Microsoft's thinking. "There's nothing new there."
Even if those discussions were to heat up again, the differing and sometimes competing interests of the various companies make concluding such a deal challenging. "It'd be like having five chefs in the kitchen," RBC's Breza says. "It's tough to make those kinds of deals work."
Meanwhile, Yahoo could talk with those potential partners and strike a deal on its own. Indeed, The Wall Street Journal reported July 2 that Yahoo recently picked up its discussions with Time Warner. But those seem to be a long shot at best. A source close to Yahoo said that there is "nothing new" in the deal discussions.