Yahoo weighs options as Microsoft drama continues

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.

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Copyright © 2008 IDG Communications, Inc.

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