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AOL, Yahoo Accelerate Talks To Thwart Microsoft Bid.

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The announcement that Yahoo and AOL may be closer to a deal to combine forces, as well as the possibility of help from News Corp in allowing Microsoft to acquire Yahoo, sparked heavy coverage in the major print and online news sources, with many stories appearing on the front pages of papers and Business sections. Writers were generally surprised by these added twists to the Yahoo-Microsoft saga.
A front-page story at the Wall Street Journal (4/10, Karnitschnig, Delaney, Marr, A1, 2.06M) reports, “Yahoo Inc. and Time Warner Inc.’s AOL are closing in on a deal to combine their Internet operations, a move aimed at thwarting Microsoft Corp.’s effort to acquire Yahoo, people familiar with the matter said Wednesday.” The AOL-Yahoo deal under consideration “would include the repurchase of some Yahoo shares at a price above Microsoft’s offer. Taken together with a possible search advertising pact with Google Inc., the plan could give Yahoo an alternative to a Microsoft takeover — although many analysts and investors believe Microsoft will ultimately win out. At the least, Yahoo’s efforts could give it more leverage to negotiate a higher price from Microsoft.” The Journal continues, “Under the terms being discussed between Yahoo and Time Warner, the latter would fold its AOL unit into Yahoo and make a cash investment in return for about 20% of the combined entity, people familiar with the situation said.” The deal “wouldn’t include AOL’s dial-up access business,” and “would value AOL at about $10 billion.” As part of the deal, Yahoo “would use the Time Warner cash and additional funds to buy back several billion dollars worth of its own stock at a price somewhere in the middle of the range between $30 and $40 a share, the people said.”
A story on the front page of the Business section at the Washington Post (4/10, Whoriskey, Ahrens, D01, 723K) reports, “The competition for Yahoo heated up last night, as the Internet portal became the prize in a sudden and furious flurry of dealmaking among the world’s largest media and Internet titans.” Yahoo “is working out a complicated deal to acquire most of AOL from Time Warner, the world’s second-largest media company, in a move that would create the Internet’s largest portal, according to a source close to those talks.” The escalation “comes as Yahoo is fighting to maintain its independence and resist Microsoft’s offer … The global media giants are jockeying against one another in a high-stakes race to seize control of Internet advertising, which is growing at a 20 percent yearly clip.”
The Los Angeles Times (4/10, Guynn, Menn, 881K) reports, “If consummated, the deal could let Yahoo wriggle out of a situation that this week had seemed inevitable: succumbing to Microsoft Corp.’s unsolicited $42-billion takeover bid.” The Times continues, “Combining AOL and Yahoo would create a consumer Internet giant with hundreds of millions of monthly visitors and a dominant position in online news, instant messaging, e-mail and other ad-supported services. It also would deal an enormous blow to Microsoft’s Web ambitions. But all three companies are far behind Google in the most profitable form of online advertising: search.” An AOL alliance “is a key part of Yahoo’s plan to show that it can again grow as an independent company and offer shareholders a viable alternative to Microsoft.”
USA Today (4/10, Swartz, 2.28M) reports, “Yahoo’s accelerated talks with AOL signal an abrupt turnabout. On Monday, Yahoo said it did not oppose a deal with the world’s largest software maker but wanted a better offer.”
The San Jose Mercury News (4/9, Ackerman, 231K) reported, “Antitrust experts say a full-blown arrangement between Yahoo and Google would raise red flags. An AOL deal would also be scrutinized. Google owns 5 percent of AOL and provides search and search advertising to the struggling portal.” Yahoo “would have to persuade shareholders the two deals would not be blocked by regulators and would create more long-term value than an immediate sale to Microsoft.” This “could be a hard sell, as a significant portion of Yahoo’s shares are held by arbitrage firms that are counting on a quick profit.”
Bloomberg News (4/9, Thaw), the Hollywood Reporter (4/9, Scalai), paidContent.org (4/9, Ali), and Computerworld (4/9, Nystedt) also reported this story.
Commentary. Charles Cooper wrote on the “Coop’s Corner” blog at CNET (4/9), “Just when I thought it was safe to head for the bar comes news, courtesy of our colleagues over at the Wall Street Journal, that Yahoo and AOL are working on a deal to combine the two companies’ Internet operations.” He continued, “Say this much for Yahoo CEO Jerry Yang: He’s giving it the old college try–anything to make sure he doesn’t wind up reporting to Steve Ballmer.” Cooper noted, “The WSJ story correctly raises the possibility that this may all be a negotiating ploy to squeeze a higher price out of Microsoft. If that is the case, Microsoft isn’t letting on just yet–at least not publicly.”
Erick Schonfeld wrote at TechCrunch (4/9), “Things are moving fast in the Yahoo-Microsoft drama. All the different forces are aligning for an endgame. The latest twist: The WSJ is reporting that Yahoo is close to signing a deal to combine with AOL.” He commented, “Tellingly, that $10 billion valuation is half of what AOL’s business was pegged at when Google invested $1 billion for its 5 percent stake in AOL a little over two years ago. (But that does not include the dial-up business). What we are witnessing is all sorts of contortions on both sides to make the numbers work. We’ve believed all along that Time Warner will put an offer on the table, but it will be difficult to make it pencil out, especially if an AOL-Yahoo combo is up against a three-way Microsoft-MySpace-Yahoo deal.”
Henry Blodget wrote at Silicon Alley Insider (4/9)
, “As we’ve argued in the past, combining Yahoo- and AOL’s assets makes sense. Until recently, Time Warner’s interest in a cash sale made the deal seem impossible, but recent speculation has been that Time Warner is now willing to swap AOL for equity in Yahoo.” He continued, “Also, AOL has no future as a standalone company, so it might as well merge with Yahoo or Microsoft now rather than later, in whole or in part. And there’s certainly no reason for Time Warner to hang onto it.” Blodget commented, “The big advantage of an AOL-Yahoo deal would be that it could happen relatively fast. (Though Microsoft would likely scream bloody murder and go rushing to the regulators). To make the deal successful, Yahoo’s management would have to be absolutely ruthless about cutting costs and eliminating redundancy, bureaucracy, etc, and ruthlessness is not their strong suit. But no matter what happens, after three years of feckless deterioration and two months of what seemed like bumbling post-bid denial, two big, aggressive moves from Yahoo in the space of a week would be a strong step toward redemption. If nothing else, Founder and CEO Jerry Yang would go down swinging.”
Om Malik wrote at GigaOm (4/9), “With Legg Mason, 7% owner of Yahoo opposing the Microsoft offer, the new plan could work. To make this plan come apart at seams unravel, Microsoft has to up the offer by a few dollars per share. I say this again, Yahoo has some serious problems. Buying AOL, already troubled in its own right, is only going to compound problems.”
Dana Farber wrote on the “outside the lines” blog at CNET (4/9), “I never thought that Microsoft’s unsolicited bid for Yahoo could get so interesting. It’s taking on Shakespearian dimensions, with various factions lobbying, forming alliances and establishing dowries for Yahoo’s favor.” He commented, “Google would benefit by the Microsoft block, its AOL relationship and potentially partnering with Yahoo, which would mean that Google is the big winner. Microsoft would be the big loser if it doesn’t succeed in acquiring Yahoo. Of course, the antitrust regulators might have a say in the matter. In some ways, Yahoo could be a loser as well in that Microsoft would technically and financially be a stronger mate than AOL, especially in battling Google over the long term. Given all the recent activity, Yahoo’s fate is less clear than when Microsoft was the only option. Perhaps, Yahoo has created an elaborate illusion to convince Microsoft to up its bid.”
Mark Hopkins at Mashable (4/9) also comments on this announcement.
News Corp. Discusses Joining Microsoft Bid For Yahoo. A story on the front page of the Business section at the New York Times (4/10, Sorkin, Helft, C1, 1.18M) reports, “Rupert Murdoch’s News Corporation is in talks with Microsoft about joining in its contested bid for Yahoo, according to people involved in the discussions. The combination, which would join Yahoo, Microsoft’s MSN and News Corporation’s MySpace, would create a behemoth that would upend the Internet landscape.” The talks “are a surprising twist in the two-month-long takeover story that began when Microsoft made a $44.6 billion bid for Yahoo.” The Times continues, “If News Corporation throws its weight behind Microsoft’s offer, that could allow Microsoft to raise its bid, putting even more pressure on Yahoo and its shareholders. At the same time, the alignment of Microsoft and News Corporation would remove a possible alternative for Yahoo, leaving it with fewer opportunities to escape Microsoft’s grasp.” The talks “represent a change of sides for Mr. Murdoch. Just days after Microsoft made its bid, he flew to the West Coast and had dinner with Jerry Yang, Yahoo’s chief executive, offering his assistance in fending off Microsoft.”
The AP (4/10) reports, “If Yahoo’s maneuvering raises the pressure for a higher bid, Microsoft reportedly may mount its counterattack with a surprising ally — Rupert Murdoch’s News Corp., whose media empire already includes the Fox television networks, The Wall Street Journal and the popular online hangout MySpace.com.” If Microsoft and News Corp. “were successful in a joint bid, it would unite three of the Internet’s most popular Web sites — Yahoo, along with MySpace and MSN.com.” The AP notes that Microsoft “might alienate one of partners, Facebook Inc., if it teams up with News Corp. in an attempt to buy Yahoo. Microsoft last year paid $240 million for a 1.6 percent stake in Facebook, which is the second largest online network behind News Corp.’s MySpace.com.”
MarketWatch (4/9, Gallagher) also covered this story.
More Commentary. Rafat Ali wrote at paidContent.org (4/9), “This just gets better and better by the second: now Microsoft (NSDQ: MSFT) and News Corp (NYSE: NWS) are in talks about combining forces to bid for Yahoo (NSDQ: YHOO), in an unlikely meeting of minds. This would create a behemoth out of MSN, Yahoo and MySpace, and be even more difficult to pass the anti-trust muster.” Yahoo’s board “is expected to meet this week to discuss its options.”
Duncan Riley wrote at TechCrunch (4/9), “A combined Microsoft/ News Corp/ Yahoo would marry Fox Interactive Media and most notably MySpace with Yahoo’s web properties and Microsoft Live and MSN services, creating an even bigger challenger to Google.”
Dawn Kawamoto wrote on the NewsBlog at CNET (4/9), “Are Microsoft and News Corp. locking arms for a joint bid for Yahoo? That would be something.” She continued, “Ironically, just last month, News Corp.’s Rupert Murdoch said he had no plans of getting into a bidding war over Yahoo with Microsoft. Talk about a cliche: If you can’t beat them, join them.” Kawamoto commented, “The day-by-day, nearly hour-by-hour, developments involving Yahoo since Microsoft on Saturday issued a three-week deadline for its reluctant target to do a deal is enough to make your head spin … One thing is for certain as the days count down to the three-week deadline: the volume of noise is going to get even louder and more frequent.”
Yahoo Teams With Google For Possible Ad Alliance. The Financial Times (4/10, Waters) reports,
“Yahoo yesterday moved to improve its bargaining position with Microsoft as it announced the test of a potential advertising alliance with Google.” Yahoo “said that, under the test, Google would supply relevant adverts alongside Yahoo’s search results.” The Times notes, “It signals the revival of an idea that Google earlier abandoned as impractical given the high possibility that antitrust regulators would block such a link between the two biggest internet search advertising companies. Microsoft itself was quick to raise the antitrust flag yesterday. … Analysts were also sceptical that the relationship could expand beyond a trial. … Even some people close to the situation warned that the chances were small that the advertising test would eventually lead to a full-blown partnership. However, they said it could be viewed as a way for Yahoo to gain greater negotiating leverage over Microsoft.”
Bloomberg News (4/9, Levy) reported, “Yahoo! Inc., seeking to scuttle Microsoft Corp.’s $44.6 billion acquisition bid, plans to run some Internet search advertisements from Google Inc. as a way to resuscitate revenue growth.” The test, “limited to the U.S., will include no more than 3 percent of search queries and will last as long as two weeks, Sunnyvale, California-based Yahoo said today in a statement.”
The AP (4/9, Liedtke) reported, “Yahoo is surrendering some of its advertising space to Internet search leader Google in an unusual test that appears designed to frustrate Yahoo’s unsolicited suitor, Microsoft.” Yahoo “will still use its own technology - acquired and developed at a cost of more than $2 billion - to place ads next to the other search results on its website. The Sunnyvale-based company also will continue to distribute search ads to its own partners.” The piece noted, “Together, Google and Yahoo control more than 80% of the U.S. search market, making it highly unlikely that antitrust regulators would allow the Silicon Valley rivals to form a long-term advertising alliance, analysts said. A broader relationship between Yahoo and Google also would face intense political scrutiny, said Sen. Herb Kohl, D-Wisconsin, who chairs a committee overseeing antitrust issues.”
Stephen Shankland wrote on the NewsBlog at CNET (4/9), “Yahoo indicated the Google test is part of its attempt to evaluate new business options, but offered cautious words about what the test might lead to.” He continued, “With the prospect of a proxy fight looming after Microsoft Chief Executive Steve Ballmer gave Yahoo a three-week ultimatum, Yahoo shareholders are increasingly important to Yahoo’s future. This is especially true of institutional investors such as insurance companies that hold large numbers of shares.” Yahoo “definitely needs to send strong signals to those shareholders, if it wants to persuade them that Chief Executive Jerry Yang’s position that Microsoft’s price is too low has merit. In a report Monday, Piper Jaffray analyst Gene Munster said that of a ‘limited sample of 20 institutional Yahoo investors, the majority suggest they prefer the current deal (with Microsoft) to no deal.’”
InformationWeek (4/9, Gonsalves) reported, “In announcing the test, Yahoo made no mention of Microsoft’s $42.2 billion takeover bid. Instead, the portal said the company’s board ‘is exploring strategic alternatives to maximize stockholder value, including exploration of potential commercial business arrangements.’” Michael Gartenberg, analyst for Jupiter Research, said, “Despite not mentioning Microsoft, Yahoo likely had the software maker in mind when it met with Google. ‘This is a way of reminding Microsoft that it [Yahoo] is still an independent company, and it still can do these types of deals.’”
Adweek (4/9, Morrissey) reported, “Outsourcing its search results to Google would amount to a stunning about-face for Yahoo!, which has battled Google tooth and nail in the search market since it bought its own algorithmic search technology and paid search system in Overture in 2003. It devoted considerable resources into overhauling its paid search platform last year, debuting Panama in October 2006.” Yet Yahoo! “has been unable to match Google in the market. Its search share has continued to fall while Google’s grows. The situation has set off a dynamic where Google is able to attract more searches, more advertisers and even higher price clicks.”
The Hollywood Reporter (4/9, Bond) and bizjournals.com (4/9) also reported this story.
Bloggers React To Yahoo-Google Ad Trial. Mark Hendrickson wrote at TechCrunch (4/9), “In what can only be interpreted as a move in its extended chess match with Microsoft, Yahoo has decided to run a two-week-long trial of Google’s AdSense for Search.” He commented, “Yahoo is eager to point out that the trial will not necessarily blossom into a long-term relationship with Google. And so the pushing continues.”
John Paczkowski wrote on the “Digital Daily” blog at All Things Digital (4/9), “Well this ought to cause a chair-tossing tantrum or two up at Microsoft HQ.” The Internet portal “will soon begin a ‘limited’ two-week test of Google AdSense with an eye toward a broader search-ad outsourcing arrangement. That said, this tentative first step is by no means a harbinger of a larger deal.” He continued, “It certainly doesn’t. Not if Microsoft has anything to say about it. In a hastily issued statement Brad Smith, Microsoft’s General Counsel, cried monopoly over the exploratory alliance. ‘Any definitive agreement between Yahoo! and Google would consolidate over 90 percent of the search advertising market in Google’s hands,’ Smith said.”
Duncan Riley wrote at TechCrunch (4/9) concerning Microsoft’s reaction, “The 90% market share in the first line is where the deal may well come unstuck (presuming its expanded). Will Government regulators sit back and allow Google to take a 90% market share through a deal with Yahoo?”
Joseph Weisenthal wrote at paidContent.org (4/9), “So far, it doesn’t have an official strategic response, other than that it’s weighing its options. But it does deliver a key message to Yahoo (NSDQ: YHOO) shareholders: ‘Our proposal remains the only alternative put forward that offers Yahoo! shareholder
s full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers.’” He commented, “Basically, if you want to get paid for your shares, you’ll go with Microsoft (NSDQ: MSFT). If you want to see the value of your holdings collapse, then sign an ad deal with Google and good luck going it alone.”
David Kaplan wrote at paidContent.org (4/9), “A number of online ad industry execs expressed extreme skepticism that Yahoo (NSDQ: YHOO) is serious about pursuing a larger, more long-term outsourcing arrangement with Google on paid search. Yahoo has taken care to make this a very limited test: only U.S. searches on Yahoo.com are involved, affiliate deals will not be affected in any way and it’s over in two weeks.” He continued, “While most of the execs I spoke to believe this is merely a way to thwart Microsoft (NSDQ: MSFT), some believe that, if carried further, this kind of relationship would severely harm its relationship with advertisers across all its vehicles and ultimately undermine the enormous time, energy and money the company has spent in fashioning itself as a major seller of online ad inventory.”