May 4, 2008 / 7:30 PM / 11 years ago

All eyes on Yahoo for alternate deal to Microsoft

NEW YORK, May 4 (Reuters) - Yahoo Inc YHOO.O faced growing pressure on Sunday to find an alternative strategy to a $47.5 billion takeover offer from Microsoft Corp (MSFT.O) after the software maker walked away over a major disagreement on price.

Yahoo was likely to push for an advertising partnership with Web search leader Google Inc (GOOG.O) that should help boost its operating performance in the near term, sources familiar with the matter said.

It is also still pursuing a deal with another Internet media and advertising major, such as Time Warner Inc’s TWX.N AOL, people familiar with the discussions said.

The expectation that Yahoo Chief Executive Jerry Yang has another strategy up his sleeve could help mitigate a steep descent for the company’s shares on Monday, but he will face angry questions from shareholders if nothing materializes.

“There are two things that could support the stock: the potential for Microsoft to return and the potential to do a Google deal,” said Clayton Moran, analyst at Stanford Group.

Moran said Yahoo shares could fall to the mid- to low-$20 range on Monday from their $28.67 close last week. That’s still higher than Yahoo’s close of $19.18 on Jan. 31, the day before Microsoft announced its offer.

Microsoft on Saturday sweetened its initial $31-per-share offer for Yahoo to $33, but then withdrew from the talks when Yang sought a price of $37.

Yahoo has been conducting tests with Google to outsource some of its search listings to its arch-rival. It has also held talks in tandem with AOL and Rupert Murdoch’s News Corp NWSa.N.

A source familiar with the matter said on Sunday that the News Corp talks had cooled in recent weeks.

“It increasingly appears like Yahoo will pursue a Google search partnership,” said Moran, who said he still favored a Microsoft buyout. “Given Google’s position (in the market), a partnership with them cedes control and limits the long-term value creation for Yahoo.”


Microsoft Chief Executive Steve Ballmer portrayed Yahoo’s options as particularly stark in a letter to Yang, suggesting any tie-up with Google would preclude a deal.

He also warned Yahoo that it would give up its relationship with advertisers by coordinating with Google and could lose some of its best engineering talent.

Some analysts disputed that idea, saying Yahoo’s operating results would certainly benefit from a Google partnership.

Other Google partners, including IAC/InterActiveCorp’s IACI.O, have structured deals that keep them in control of their advertiser ties, said Jeffrey Lindsay of Sanford C. Bernstein.

“If they operated as an exchange, Yahoo would at least keep the part that it sold,” he said.

Lindsay estimates Yahoo could be worth up to $35 per share if it forges a Google deal, and could nudge that higher to $37 per share with additional job cuts. But if there are no partnerships in the offing, that value drops to $25 per share, he said.

“It’s time to get a move on with Google,” he said. “Let’s hope they weren’t bluffing.” (Additional reporting by Kenneth Li in New York and Anupreeta Das in San Francisco; Editing by Braden Reddall)

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