May 19, 2008, 10:05 AM — Although Microsoft provided no details Sunday about what deal
it might cut with Yahoo, it seems highly likely that search advertising
would be a major piece.
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.














