Microsoft, Yahoo still dancing

Analysts believe a deal will happen

May 20, 2008|By Brandon Bailey | Brandon Bailey,San Jose Mercury News

SAN JOSE, Calif. - Microsoft Corp. has invited hundreds of media, tech and advertising industry representatives to its Redmond, Wash., headquarters today for the company's annual conference on advertising. But many will be keeping one eye turned to Silicon Valley, where Yahoo Inc. executives are weighing a deal for sharing some of their business with the software giant.

While the two companies remained tight-lipped about details of their latest discussions, which were announced Sunday, Wall Street analysts said an agreement focusing on Yahoo's online search advertising business could make sense for both firms.

Some analysts predicted the talks could still lead to Microsoft buying a piece of Yahoo or all of it, outright.

"We believe that a core issue for Microsoft is to acquire Yahoo on friendly terms," said Ben Schachter, an Internet analyst for UBS Securities, in a note to investors yesterday. "A near-term deal could act as an intermediate step that would go a long way toward testing the waters."

Billionaire investor Carl C. Icahn, meanwhile, gave no sign of backing away from his push to replace the current Yahoo board with directors who will support a sale.

"Ultimately, he wants to make the most money possible," said analyst Eugene Munster of Piper Jaffray, "and the way he makes the most money possible is by a full acquisition."

Icahn, who owns 10 million shares of Yahoo stock, launched a campaign last week to unseat Yahoo's board at its July 3 meeting. He criticized the company's leadership for not striking a deal with Microsoft, which withdrew its bid to buy Yahoo for $47.5 billion this month.

Microsoft had wanted to buy Yahoo in order to compete with Google, which currently dominates the lucrative search advertising market. Yahoo ranks second and Microsoft a distant third.

In a brief statement, Microsoft announced Sunday that it had proposed a new arrangement with Yahoo that was not an outright sale. Yahoo said late Sunday that its board would give any proposal due consideration, but it did not elaborate. Both companies declined to comment yesterday.

But The New York Times, citing unnamed sources, reported Sunday that Microsoft is now suggesting a partnership or joint venture for search advertising. Yahoo recently tested a similar arrangement with Google, in which Yahoo displayed Google ads and shared the revenue with Google.

Yahoo has other business assets, including an e-mail service and various content platforms, that Microsoft may not want, said analyst Sandeep Aggarwal of Collins Stewart. In a note to clients yesterday, he suggested that Microsoft might buy Yahoo's search business - which he valued at $21 billion - or negotiate a partnership, rather than swallow the whole company.

There's another reason that a partnership might be good for both firms, said analyst George Askew of the firm Stifel Nicolaus. He said a forced sale of Yahoo would be damaging to company morale and could prompt an exodus of talented Yahoo employees.

Another possible scenario was raised yesterday by several Internet bloggers, who suggested Microsoft might try to expand its Internet operation by buying the social networking company Facebook, in which it owns a small stake. Both companies declined to comment.

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