Yahoo’s search business can fetch $15 billion from Microsoft, investor says*


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* Updated at 9 a.m. with analyst reaction

More pressure on Yahoo to sell its search-engine business to Microsoft: Ivory Investment Management, a Los Angeles-based firm that owns 1.5% of Yahoo’s shares, today urged the Internet company to do a deal already.


Yes, that deal. The one that Microsoft Chief Executive Steve Ballmer said makes sense. The one that Yahoo’s outgoing CEO, Jerry Yang, said makes sense. The one that Carl Icahn said makes so much sense that he launched a proxy fight, joined Yahoo’s board and has continued to lobby for the deal. The one that, despite all that, hasn’t gone anywhere.

But in a letter released this morning, Ivory Investment, which owns 21.4 million shares, said Yahoo’s board had failed to maximize shareholder value by rebuffing Microsoft’s attempts to acquire Yahoo or its search business. ‘In light of Microsoft once again publicly reaching out to explicitly express interest in entering a search deal with Yahoo, we feel compelled to write this letter to ask ...

... the Board to take appropriate and prompt action and not miss yet another value maximizing opportunity,’ said the letter (PDF) from the firm’s managing partner, Curtis Macnguyen.

The companies need each other to stand any chance of competing with Google in Web search, he argued. Since combining their search businesses would reduce operating costs and increase their profitability, he said, Microsoft could pay more than $15 billion upfront for Yahoo’s search business and still make out well. He argues that the cash infusion and resulting improved efficiency -- plus a Yahoo tender offer that would reduce the number of shares outstanding -- could boost the value of the Sunnyvale, Calif., company’s shares to $29, just below the amount that Microsoft originally offered to acquire all of Yahoo.

Given that Yahoo’s market value is not much more than that -- $18 billion, after the letter’s release pushed up the company’s shares more than 6% to nearly $13 -- it could be wishful thinking on the part of a big investor. Analyst Gene Munster of Piper Jaffray, in a research report this morning, said Ivory Investment’s analysis of the operating implications of combining the two search businesses appeared to be sound, but he called the idea of a $15-billion upfront payment from Microsoft ‘unrealistic.’

But who knows, maybe Macnguyen has been getting signals from the Microsoft or Yahoo camps that a deal like this could work, so it’s floating potential terms in hopes that the market responds favorably (it has).

The letter concludes:

Considering the fact that (1) you arguably misplayed your hand by losing the initial $31 per share offer, (2) the stock is down over 60% from that price (vs. a broad market decrease of around 35%), and (3) Microsoft is still reaching out to do a search deal, we urge the remaining Board members to commence constructive discussions with Microsoft immediately. This time around, the Board cannot allow another tremendous value creation opportunity to slip by.


So far, public calls for a deal, even from the companies themselves, have led to nothing. Let’s see if Ivory Investment can push the two together.

-- Chris Gaither