FT.com / In depth - Web giants take sides in battle for Yahoo

FT.com / In depth - Web giants take sides in battle for Yahoo

Web giants take sides in battle for Yahoo
By Richard Waters and Chris Nuttall in San Francisco and Joshua Chaffin in New York

Published: April 9 2008 21:23 | Last updated: April 10 2008 05:43

Yahoo ratcheted up its efforts on Wednesday to improve its negotiating position in the face of an unsolicited takeover bid from Microsoft, amid signs that it was edging towards a three-way alliance with Google and AOL that might protect its independence or at least force Microsoft to pay more.

There were also reports that News Corp was in talks with Microsoft about joining in that company’s bid for Yahoo. The talks involve News Corp combining MySpace, its social networking service, with the Microsoft and Yahoo internet businesses, according to the reports. Both News Corp and Microsoft refused to comment.

The flurry of activity came as Yahoo and Microsoft positioned themselves for the end-game in the takeover battle, which began at the end of January. Microsoft tried to turn up the heat on Yahoo over the weekend by threatening to take its cash-and-stock offer, currently worth $42bn, directly to the embattled company’s shareholders and hinting that it might even cut the value of its offer. Yahoo countered by repeating that the offer price was too low and that while it did not rule out a deal with Microsoft at a higher price, it was pursuing alternatives.

Yahoo gave the first public sign of one possible alternative on Wednesday when it announced the test of a potential advertising alliance with Google. The two-week experiment, due to start next week, will involve Google supplying relevant adverts alongside a small sample of Yahoo search results.

The test suggested that the two sides were once again discussing an alliance that would involve Yahoo closing down its own search advertising system and outsourcing the work to Google. The idea was discussed last year and again after Microsoft made its unsolicited bid, but Google had appeared to cool on the idea amid concerns that it would be blocked by anti-trust regulators.

The idea of Yahoo abandoning its own search advertising system and adopting Google’s has long been promoted by several Wall Street analysts. They see it as a way for Yahoo to cut costs and boost revenues, with Google yielding 30 to 40 per cent more revenue per search than Yahoo.

“What they’re doing now is testing revenue assumptions about what they could expect” from a search advertising alliance, said one person who is familiar with the situation.

Microsoft was quick to raise the anti-trust flag on Wednesday. “Any definitive agreement between Yahoo and Google would consolidate over 90 per cent of the search advertising market in Google’s hands; this would make the market far less competitive,” said Brad Smith, Microsoft general counsel.

Some analysts were also sceptical that the relationship could expand beyond a trial.

“We do not think a broader or longer-term Yahoo/Google search partnership would pass regulatory muster,” said Scott Kessler, Standard & Poor’s internet services analyst, in a note. 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.

Meanwhile, talks have been continuing over a separate deal involving Yahoo and AOL, according to people familiar with the situation. Accounts differed on Wednesday over how close the two sides were to an agreement. The two have for several weeks been discussing a deal that would involve Time Warner injecting its AOL division into Yahoo in return for a stake in the company.

One person close to the situation described the talks as “fluid” and said the two sides were still some way from any deal, though another person said that considerable headway had been made and an agreement could come as early as next week.

A deal with AOL alone would not create enough value for Yahoo shareholders to justify turning down the big takeover premium offered by Microsoft, according to one Yahoo investor. It has been seen instead as part of a three-way transaction also involving Google, since outsourcing search advertising would have a far bigger and more immediate impact on Yahoo’s earnings.
Copyright The Financial Times Limited 2008