Microsoft-Yahoo saga continues

Elise Ackerman and Brandon Bailey |

7/3/2008 -

San Jose Mercury News

SAN JOSE, Calif. — In the wake of Microsoft's failed bid to buy all of Yahoo, one thing is clear: The two companies have what could be called a failure to communicate.

As the Microsoft-Yahoo takeover saga grinds into its sixth month, contacts between the companies are continuing. But the status of talks between them is an increasingly muddled mess complicated by the fact that Time Warner's AOL has quietly been put in play, according to sources familiar with the matter who have not been authorized to speak by their employers.

At the moment, Microsoft remains interested in "an alternative transaction" along the lines of a proposal that it made in mid-June to buy Yahoo's search business, a source close to Microsoft reiterated.

Just days after Yahoo rejected that proposal and announced a business arrangement with Google instead, Microsoft chief executive Steve Ballmer, still in pursuit, called Yahoo Chairman Roy Bostock. They scheduled a meeting for this week.

But Ballmer backed out.

Was it because he couldn't find partners willing to make a joint offer that would split the company between search and other businesses, as suggested in a story published in the Wall Street Journal on Wednesday? Or was Ballmer waiting to see how much further Yahoo's stock would drop, after watching it slide 14 percent in the wake of the Google announcement?

Or was he busy looking into the possibility of buying AOL?

One thing is clear: "Everyone is talking to everyone," said two separate sources who are familiar with the saga. In fact, the Journal reported later Wednesday that Yahoo was also talking to Time Warner about some type of deal for AOL.

But so far all that's come of it is chitchat.

Jeffrey Lindsay, an analyst with Sanford C. Bernstein, said the chances Microsoft and another media company will make a joint offer to buy Yahoo "are extremely low."

Lindsay said he analyzed the economics of such a scenario when it was rumored a few months ago and found the numbers didn't add up. Based on the likely value of a partial acquisition to Time Warner or News Corp., he said, "in any transaction you can construct, there's a funding gap" of $5 billion to $6 billion.

"You'd need some kind of private equity partner who'd be prepared to put in that amount of money."

"What's fully dawning on everybody is just the size of what was missed when Yahoo turned the Microsoft deal down" earlier this year, Lindsay added. Microsoft withdrew a final offer to buy Yahoo for $33 a share, or $47.5 billion, on May 3.

Yahoo rose about 3 percent Wednesday to close at $20.88, as investors tried to digest news of a formal U.S. Department of Justice investigation into its deal with Google and the confusing message of its ongoing conversations with Microsoft. That values the whole company at $28.7 billion.

While formal Justice Department investigations into business agreements are rare, a source familiar with the process said the parties were following a timetable that had been worked out in advance for compulsory disclosures between Google, Yahoo and government regulators and didn't signify newfound concern by Justice lawyers.

Larry Haverty, a portfolio manager with Gamco Investors, said he still believes a deal between Microsoft and Yahoo will eventually get done because of the bigger picture — the extra $70 billion that is expected to flow into Internet advertising in the next five years. "If you are Microsoft, you have to be in that business," he said.