Yahoo, Microsoft: Off again ... on again?

by Elizabeth Montalbano

May 7, 2008 —

Just when it seemed that their stormy relationship had ended, Yahoo and Microsoft
may end up reconciling and coming to terms on a merger sooner rather than later.

Comments by both CEO
Jerry Yang and President Sue Decker -- pressured by a sliding
stock price and grumbling
shareholders -- seem to indicate Yahoo may be willing to return to the bargaining
table to make the deal happen while their seats are still warm.

It's become apparent following what appeared to be the end to a three-month
saga -- which began when Microsoft offered an unsolicited
US$44.6 billion bid for Yahoo on Feb. 1 -- that there was far more than
met the eye about Microsoft's courtship of Yahoo.

As in any relationship, the scenario perceived in public and played out in
the press -- that of an ardent Microsoft pursuing an unwilling Yahoo -- doesn't
tell the whole story.

It seems now that not everyone at Yahoo was keen on spurning Microsoft, and
not everyone at Microsoft was all fired up to do the deal. A realization that
the two really do need each other may inspire the companies to eventually marry,
like an on-again, off-again couple.

Decker, who had been noticeably silent since Microsoft's initial offer, found
her voice Tuesday in an interview published on the "Tech Ticker" webcast
on Yahoo Finance. In the interview, she hinted that Yahoo might still be open
to a deal, pointing out that it would be beneficial for both companies.

"When you stack up Microsoft's assets and Yahoo's assets, there are certainly
some real reasons why the combined company could be really successful,"
she said, according to the webcast.

Decker's comments follow similar ones Yang made on Monday. Yang -- who steered
Yahoo to avoid acquisition -- has been accused of not wanting to give up his
baby and blocking the deal for emotional reasons rather than shareholders' interests.

However, once Yahoo stock tumbled and shareholders expressed ire, he relented
in an interview with Bloomberg that he and board members would still be open
to selling to Microsoft -- or anyone else, for that matter -- if the price were
right.

Yang also said on Monday, in an interview with the Financial Times, that it
was Microsoft, not Yahoo, that walked away from the deal; his company was still
willing to negotiate on price, he said.

Decker, too, said price was the deal breaker, yet she defended Yang against
allegations that he hasn't put shareholders first during negotiations with Yahoo.

"Absolutely the sole guiding light in this process was maximizing shareholder
value," she said.

On the other side of the fence, despite his bluster and insistence that a Microsoft-Yahoo
combo would "deliver superior value to our respective shareholders, creating
a more efficient and competitive company that will provide greater value and
service to our customers" -- in an ultimatum to Yahoo's board on April
5 -- even Microsoft CEO Steve Ballmer seemed to lose the thrill of the chase
the longer Yahoo held out.

By the waning days of negotiations, according to the New York Times, Ballmer
appeared ambivalent to Microsoft's infatuation with Yahoo.

"Should we just forget it?" he asked aides about the deal, the New
York Times reported Tuesday.

Forget it. Microsoft seems to have done that, and several executives -- including
Microsoft founder and Chairman Bill Gates -- have already asserted publicly
that the company has moved on and is ready to go it alone to improve its Internet
business.

"Microsoft is focused on its independent strategy," Gates said, speaking
in Tokyo on Wednesday.

Still, some believe Microsoft, which has bungled its Internet and online advertising
strategy so far, may need Yahoo just as much as Yahoo needs them.

Andrew Brust, chief, new technology at consulting firm Twentysix New York,
wrote in a blog
posting that Microsoft's struggling Internet business -- and the fallout
from problems surrounding its Windows Vista OS -- make a deal with Yahoo crucial
to the company's future.

"They need this deal, despite Steve Ballmer’s protestations to the
contrary, and despite the prevailing wisdom that the merger would be unsuccessful,"
he wrote. "I don’t see a good alternative acquisition. ... If Microsoft
fails here, and continues to mishandle its damage control around Vista, then
the company will be in a bad place. The setback won’t be irreparable, but
it will be significant."

Financial analysts, too, believe a deal may still be imminent. In a research
note earlier this week, Piper Jaffray analysts Gene Munster and Vivian Li wrote
that there "are still many pieces and players that need to sort out before
the dust truly settles."

"We continue to believe that Microsoft needs help to create a formidable
online advertising presence and believe Yahoo still makes the most sense as
an acquisition," the analysts wrote.

A Citibank research note by analyst Mark Mahaney, published Tuesday, also mentioned
that a deal between the two companies is a possible scenario for Yahoo's future.

For that to happen, Microsoft and Yahoo would have to see the error in their
ways now that they've parted. If fallout from Yahoo shareholders proves too
daunting for the company's board to handle, and Microsoft can't see another
way to quickly revive its Internet business, the potential is there for a Microsoft-Yahoo
partnership to blossom again.

IDG News Service