Yahoo, Microsoft end talks

Microsoft says 'alternative' deal still on the table

Yahoo Inc. has ended its talks with Microsoft Corp. about a deal narrower in scope than a full acquisition, the company said today.

Instead, Yahoo is nearing an agreement with Google Inc. involving its search advertising business, The Wall Street Journal reported. Yahoo made no mention of such a deal in a statement it issued late this afternoon. Such deals are typically announced either before U.S. financial markets open in the morning or after they close at 4 p.m. Eastern time.

Yahoo said it has concluded talks with Microsoft because Microsoft was only interested in purchasing Yahoo's search business, not all of the company.

With respect to this, Yahoo's board decided "that such a transaction would not be consistent with the company's view of the converging search and display marketplaces, would leave the company without an independent search business that it views as critical to its strategic future and would not be in the best interests of Yahoo stockholders," the company said in a statement.

Microsoft confirmed that it was not interested in rebidding for all of Yahoo, but had been seeking an "alternative transaction" that it believed would bring Yahoo shareholders more than $33 per share, according to a statement. The $33 per share price had been Microsoft's previous final bid for all of Yahoo.

Microsoft said this alternative transaction remains on the table, and did not confirm that talks between it and Yahoo have concluded.

After Microsoft ended its acquisition bid for Yahoo on May 3, the companies acknowledged that they were in talks for an unspecified deal that most observers assumed involved Yahoo's search-advertising business.

Yahoo and Google had also been in talks about a search-advertising deal for several months, a deal that Microsoft cited as one of its primary reasons for ending its acquisition bid.

In April, Yahoo announced that it would test running Google ads along with its search results. Afterward, the companies said the test had gone well, but declined to provide more details on whether they would seek a longer-term, more formal, agreement.

Microsoft and Yahoo failed to come to terms on either a full or partial acquisition after months of on-again, off-again negotiations. Yahoo now faces the possibility of its board members being voted out by shareholders in a proxy battle spurred by billionaire investor Carl Icahn.

Icahn and Yahoo Chairman Roy Bostock have been trading barbs in public letters back and forth for the past week and a half as Icahn increased public criticism of how Yahoo has mishandled its dealings with Microsoft. On Friday, he told Yahoo's board to offer itself up for sale to the software giant for $49.5 billion and be done with it. Icahn also said he would seek to replace Yahoo CEO Jerry Yang if his proxy bid is successful.

In response, Yahoo's board has defended its actions of the past several months. Through this public disagreement between Icahn and Yahoo, Microsoft has remained noticeably silent, so it was never clear if the company was still interested in purchasing Yahoo for that price or any other.

Once Microsoft walked away from a deal with Yahoo, it was in Microsoft's best interest to wait and see what Icahn would do, said Rob Enderle, an analyst at Enderle Group in San Jose. "Microsoft clearly wants to negotiate with somebody who wants to negotiate with them and not with the Yahoo folks," Enderle said.

Microsoft is not being aggressive in sweetening its deal with Yahoo because it would be better for Microsoft to keep everything off the table until Icahn's group takes over, which is likely, Enderle said.

Allan Krans, an analyst at Technology Business Research Inc. in Hampton, N.H., said he wasn't surprised that the talks between the two companies had broken down again. Once the full deal didn't go through and the talks transitioned to a partial acquisition, Krans said it was hard for Yahoo to justify breaking off some of the best pieces of its business and doing a partial acquisition.

"From a Yahoo management and shareholder standpoint, it's tough to structure a deal that leaves the company with the least desirable pieces of the business standing by themselves," he said.

Today's news likely will inspire more ire from Icahn, though it's not clear what he would do with Yahoo if he is successful in ousting its board but cannot find another company to purchase Yahoo.

On May 15, Icahn sent a letter to Yahoo's board announcing he is nominating 10 candidates to replace all incumbent directors at the company's shareholders meeting in July. A few days later Microsoft and Yahoo said publicly that they were both open to negotiating another deal, although not one for Microsoft to totally purchase Yahoo but instead to buy only pieces of the company.

Icahn's move and the possible shake up of Yahoo's board may have led one director, Edward Kozel, to resign on May 22. His resignation prompted Yahoo to push its shareholder meeting back to Aug. 1 and to operate with only nine directors until then.

Icahn's actions came after Microsoft and Yahoo failed to come to an agreement after two months of haggling on a price.

On Feb. 11, Yahoo rejected Microsoft's Feb. 1 official bid for the company of about $44.6 billion, claiming it was too low. This set about several weeks of negotiations between the companies.

During that time, Yahoo did everything it could to avoid an acquisition by Microsoft, seeking other suitors and striking the deal with Google to test Google's AdSense for Search service as one of the Web publishers that carry pay-per-click text ads from Google.

Yahoo also attempted to buy time when Microsoft threatened to mount a proxy battle for the company, which it implied it would do first in a letter to the company on Feb. 12 and later in harsher terms in a letter to Yahoo's board on April 5.

For example, on March 5, Yahoo lifted the following week's deadline for nominating directors to its board, an attempt to discourage Microsoft from trying to replace the current board with members willing to approve its Yahoo acquisition bid.

Yahoo also unveiled a flurry of product and strategy announcements in the months following Microsoft's bid, pointing out that each initiative proved it could continue to go it alone as an independent company.

Microsoft eventually pushed the price it was willing to pay for Yahoo up about $5 billion, or to $33 per share, but Yahoo still wasn't satisfied with the price. Yahoo executives later claimed it was Microsoft that ultimately walked away from the deal the first time.

In the days that followed before Icahn mounted his proxy battle, Microsoft distanced itself from Yahoo, and executives said the company was moving on. Yahoo executives, meanwhile, seemed to backpedal when it became clear that board members and investors weren't happy with the deal falling through, and said they would be open to being acquired for the right price if Microsoft or another suitor came calling.

Linda Rosencrance of Computerworld contributed to this report.

Copyright © 2008 IDG Communications, Inc.

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