NEW YORK, April 10 (Reuters) - Yahoo Inc YHOO.O may have played its top two cards by pulling out possible deals with AOL and Google, but it does not seem to have changed Wall Street’s view that Microsoft will eventually win the takeover battle.
Yahoo announced on Wednesday a test to outsource Web search advertising to Google Inc (GOOG.O), which sources say is part of a three-way alliance that would combine Yahoo with Time Warner Inc’s (TWX.N) AOL instead of Microsoft Corp (MSFT.O).
But hours later, the software giant appeared to trump Yahoo’s announcement as The New York Times reported that Rupert Murdoch’s News Corp NWSa.N was in talks to join Microsoft’s $42.4 billion bid for the Web pioneer.
“We continue to believe (a Microsoft) deal is the most likely outcome,” Citi analyst Mark Mahaney wrote in a report, adding it would likely be priced higher than the initial $31-per-share bid from Microsoft in February.
Yahoo shares rose a modest 2.6 percent while Microsoft rose 1.4 percent on Thursday, indicating investors still believed Microsoft would emerge the winner. Microsoft’s cash-and-stock offer currently values Yahoo at about $29.45 per share.
Until the Google/AOL news on Wednesday, Yahoo had appeared to be running out of alternatives to accepting Microsoft’s takeover offer, with the software company threatening to lower its bid if it was not accepted within three weeks.
But Yahoo is nearing a deal with Time Warner to fold AOL, excluding its legacy dial-up Internet access operations, into a combined company, sources familiar with the talks told Reuters. Such a deal would value AOL at $10 billion and Yahoo would get cash from Time Warner in exchange for 20 percent of the combined Yahoo-AOL.
The Wall Street Journal reported that Yahoo would use the cash and other funds to buy back several billion dollars worth of Yahoo stock at a price somewhere in the middle of the range between $30 and $40 a share.
“In our view Yahoo management would have a difficult time convincing a majority of its shareholders this deal is worth more than Microsoft’s offer,” UBS analyst Heather Bellini wrote in a report. “Even if shares were repurchased at $35-plus a share, the shares likely would pull back once the buyback is done.”
As for a joint Microsoft-News Corp bid, that would create a more formidable competitor to Google by bringing together three of the biggest Web site publishers: Yahoo, Microsoft’s MSN and News Corp’s MySpace social network.
But Bellini noted that while a tie-up could make sense, “we think it would increase the integration risk and may not outweigh the decrease in financial risk.”
Google is considered unlikely to enter the bidding directly as its growing dominance in Web search and search-based advertising could be blocked by competition regulators.
But sources familiar with the talks said a two-week test on whether Yahoo can use Google to sell ads alongside Web search services could lead to a broader deal.
Citi’s Mahaney estimated a full search outsource could generate over $1 billion in incremental cash flow to Yahoo.
Yahoo said the initial test with Google is small, covering only 3 percent of Web searches performed on Yahoo.com.
Any of the combinations would fundamentally change the Web, as the first decade of growth has begun to slow dramatically. The talks with News Corp, which previously had discussed working with Yahoo as a counter to Microsoft’s unsolicited bid, are at a sensitive stage, The New York Times said. The Wall Street Journal called those talks “serious.”
Yahoo shares rose 73 cents to $28.50, Microsoft gained 40 cents to $29.29 and Google rose $5.50 to $469.59 on the Nasdaq. News Corp was 8 cents higher at $19.02, and Time Warner rose 11 cents to $14.54, both on the New York Stock Exchange.
Microsoft, News Corp, Time Warner, Google and Yahoo have all declined to comment on the talks. (Reporting by Tiffany Wu, editing by Maureen Bavdek)