Yahoo weighs options as Microsoft drama continues

by Elizabeth Montalbano

April 11, 2008 —

Yahoo is weighing its options to accept a buyout by Microsoft or consider tie-ups
with other companies, in particular a reported plan to join forces with AOL,
as a way to stave off the software giant's advances.

The possibilities for the ending to the story that begin on Feb. 1, when Microsoft
made its US$44.6 billion offer for Yahoo, have become dizzying, with rumors
cropping up almost daily in the past week about what the ultimate outcome might
be. The Wall Street Journal reported Friday that Yahoo's board was meeting to
discuss the company's options, which to many seem limited to one: accepting
Microsoft's current offer.

In between the rumors and speculation, Yahoo has been making some of its own
moves to avoid being subsumed by Microsoft. On Wednesday the Internet company
said it is testing Google's AdSense for Search service, acting as one of the
Web publishers that carry pay-per-click text ads from Google. The move opens
up the possibility that eventually Yahoo may outsource its paid-search business
to Google, which might provide a way out of having to make a deal with Microsoft.

Predictably, Microsoft was none too happy about the news and spared no time
pointing out all the ways that kind of union could run into regulatory problems,
because it would give Google and Yahoo 90 percent of the search-advertising
market.

By Thursday, Rupert Murdoch's media empire News Corp. was said to be hatching
a plan with Microsoft to sweeten the deal for Yahoo. News Corp. recently had
been considered a possible spoiler to Microsoft's plan, but CEO Murdoch shot
down those rumors in March. A deal to go in with Microsoft to buy Yahoo would
at least give his company a piece of the action.

On the same day, the rumor that Yahoo and AOL may join forces was dusted off
and surfaced again in the public domain. Rumors that Yahoo and AOL might merge
have been swirling since 2006, and one financial analyst on Friday even said
it might be the only way Yahoo can avoid Microsoft's buyout. Sanford C. Bernstein's
Charles Di Bona surmised in a research note that a Yahoo-AOL deal could give
investors more money than the Microsoft deal if AOL's parent company, Time Warner,
were to contribute some cash to it.

No matter what happens when the dust settles and rumors become reality -- or
not -- one thing is quite likely: combining the infrastructure for the Internet
businesses of Yahoo and Microsoft, or Yahoo and AOL, or Yahoo and Microsoft
and News Corp., is going to be a logistical headache. And even once a deal is
made, it will be years before anyone reaps a reward from what could turn out
to be an unwieldy mega-merger.

In case you're having a hard time keeping track, here's a brief history of
events as they've unfurled in the ongoing Microsoft-Yahoo drama:

May 2006: Some of the earliest rumors that Microsoft is considering
an offer to buy Yahoo appear in the New York Post and The Wall Street Journal;
at the time such a deal is considered far-fetched, so the rumors are dismissed
fairly quickly.

October 2006: Rumors begin to swirl that Yahoo has approached Time Warner
about purchasing AOL, a notion that is somewhat more believable than a Microsoft-Yahoo
deal.

2007: Microsoft-Yahoo rumors surface from time to time but disappear
soon after, as there is nothing to substantiate them.

Feb. 1, 2008: In the shot heard 'round the Internet, Microsoft makes
a formal purchase offer of US$44.6 billion based on Yahoo's stock price
of $19.18; Yahoo's stock price starts rising.

Feb. 11: Yahoo
rejects Microsoft's offer as too low; Yahoo stock price closes at $29.87.
According to the rumor mill, Yahoo is now looking for closer to $40 a share
because the value of the company has risen since the offer.

Feb. 12: Microsoft for the first time publicly hints in a letter to
Yahoo that it is willing to get
hostile in its takeover, saying it "reserves the right to pursue all
necessary steps to ensure that Yahoo's shareholders are provided with the opportunity
to realize the value inherent in our proposal."

March 5: Reports emerge that Yahoo is stepping up negotiations with
Time Warner for some kind of tie-up with AOL. Meanwhile, reports make the rounds
that Microsoft will mount a proxy fight if Yahoo won't play ball.

March 11: News Corp.'s Murdoch says publicly that he won't "get
into a fight" with Microsoft over Yahoo, because the software giant has
"a lot more money" than his company.

April 5: Microsoft
sends Yahoo a join-us-or-die letter, claiming that if the two companies
can't make a deal in three weeks, Microsoft will take its offer directly to
shareholders in a proxy battle. In the letter, signed by Microsoft CEO Steve
Ballmer, Microsoft basically tells Yahoo board members they've run out of better
options, and it would be foolish not to accept an offer immediately. Microsoft
also hints that it would consider Yahoo less valuable if it is forced to mount
a proxy fight, thus threatening to lower its offer.

April 7: Yahoo
again rejects Microsoft's offer on the basis that it is too low. In a letter
signed by Chairman Roy Bostock and CEO Jerry Yang, the company calls Microsoft's
threat of a proxy battle "unproductive," and says it would consider
a deal if Microsoft was willing to pony up more dough.

April 9: Yahoo says it is testing
the display of Google search ads in a small number of its search-engine
queries, a move seen as a way to stave off Microsoft's advances. Microsoft immediately
attacks that notion as anticompetitive and says it would never pass regulatory
approval.

April 10: News
Corp. is said to be in talks with Microsoft to join forces to buy Yahoo,
seen by many as a way that Microsoft can raise its offer without spending any
more money. At the same time, the old Yahoo-AOL union talk again makes the rounds.

IDG News Service