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2008-04-10 10:45:19
By MICHAEL LIEDTKE, AP Business Writer1 hour, 7 minutes ago
Yahoo Inc.'s last-ditch efforts to avoid a takeover by Microsoft Corp. appear
to be setting the stage for a dramatic finale featuring a rich cast of Internet
and media stars.
Eager to frustrate Microsoft in any way possible, Internet search leader Google
Inc. has already agreed to help out Yahoo by participating in an unusual test
that will gauge how much more advertising Google can sell for its struggling
rival.
The two-week experiment announced Wednesday will be limited to ads posted
alongside a small percentage of Yahoo's online search results in the United
States.
Yahoo reportedly hopes to build upon the Google deal by combining its online
operations with Time Warner Inc.'s AOL, which has been struggling to regain its
stride after stumbling badly for years. Google already handles AOL's search
advertising and owns a 5 percent stake in the Time Warner subsidiary.
As part of the AOL deal, Time Warner would make a cash investment in return for
a 20 percent stake in the combined entity, according to a Wall Street Journal
story that cited unnamed people familiar with the matter. Yahoo then would use
the Time Warner cash to buy back stock to put some money in shareholders'
pockets. Yahoo would pay between $30 and $40 per share for an unspecified
amount of stock, the Journal said.
Microsoft's bid was worth about $42 billion, or $29.24 per share, as of
Wednesday, when Yahoo shares closed at $27.77.
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 New York Times reported Microsoft's discussions with News Corp. late
Wednesday, citing people involved in the discussions.
Yahoo had previously been exploring using an alliance with MySpace as one of
its escapes from Microsoft.
All the negotiations are at a sensitive stage and still could unravel,
according to the newspapers' reports.
Contacted late Wednesday, a Yahoo spokesman declined to comment on the reported
AOL talks. Microsoft representatives didn't respond to inquiries.
The complex web of deals faces various complications.
Because Google and Yahoo control a combined 80 percent of the U.S. search
market, any long-term advertising alliance between them almost certainly would
have trouble getting antitrust clearance, analysts said.
A broader relationship between Yahoo and Google also would face intense
political scrutiny, said Sen. Herb Kohl, D-Wis., who chairs a committee
overseeing antitrust issues.
A Yahoo-AOL combination probably would have to overcome shareholder skepticism
because both companies have been fading in recent years. Before Microsoft
announced its bid Jan. 31, Yahoo's market value had plunged by nearly $30
billion during a two-year period. AOL is now believed to be worth about $10
billion, about half of its value when Google paid for a $1 billion stake in
2005.
And 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.
Yahoo has been working for more than two months to put together a package that
trumps Microsoft's takeover bid.
Microsoft has set an April 26 deadline for Yahoo to accept its current offer,
which was initially valued at $44.6 billion, or $31 per share. The deal's value
has eroded because Microsoft wants to pay for half of the acquisition with its
recently declining stock.
Analysts have said that Microsoft can afford to pay about $35 per share, or
about $50 billion, for Yahoo without undermining its future earnings. Yahoo has
indicated it thinks its franchise is worth at least $40 per share, or more than
$55 billion.
Yahoo's ad tests with Google make a friendly deal with Microsoft less likely
and raises the odds that Microsoft will follow through on a recent threat to
lower its bid, said Standard and Poor's equity analyst Scott Kessler.
In a statement Wednesday, Microsoft reiterated its bid is fair and pointed out
the antitrust problems likely to prevent Google and Yahoo from working
together.
"This would make the market far less competitive, in sharp contrast to our own
proposal to acquire Yahoo," said Brad Smith, Microsoft's general counsel. "We
will assess closely all of our options."
Microsoft has said that if things can't be worked out amicably, it is prepared
to oust Yahoo's 10-member board in a proxy contest that could prolong the drama
into the summer.
If the Google tests were to begin immediately, they would be completed shortly
before Microsoft's April 26 deadline.
Yahoo didn't specify when the trial run would begin but said the test doesn't
mean it will join the thousands of other Web sites that rely on Google to place
text-based advertising links next to search requests or their other content.
Under the deal announced Wednesday, Google will show ads tied to about 3
percent of the queries made in the United States through Yahoo's search engine
the Internet's second largest after Google's.
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 Web
site. The Sunnyvale-based company also will continue to distribute search ads
to its own partners.
By flirting with Google, Yahoo is trying to prove it has other options besides
succumbing to Microsoft, Kessler said. But he doubts most investors will take
the Google alternative seriously, given the antitrust obstacles.
"It doesn't make a lot of sense for Yahoo to make an announcement like this
when everyone knows a long-term relationship (with Google) can't happen,"
Kessler said. "It strikes me as somewhat desperate."
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