Price may bring Microsoft back

Times Staff Writer

In calling off its offer for Yahoo Inc., Microsoft Corp. proclaimed its determination to build a bigger online advertising and services business by itself.

But the less interest the world’s largest software company seems to have in Yahoo, the more likely it seems the two may end up together.

That’s because the key sticking point in the takeover talks that fell apart Saturday was price. If Yahoo investors take Microsoft’s decision to walk away as final, that could depress Yahoo’s stock to the point where Microsoft might reopen the bidding.


“This is one more negotiating ploy,” said Pacific Crest Securities analyst Brendan Barnicle. “The reality is that when Yahoo was trading under $20, it was interesting to Microsoft. If the stock is going to fade back down to the $20 level, I think Microsoft gets interested again.”

Yahoo’s shares traded above $28 on Friday in hopes that a deal would be finalized over the weekend at or above $31, the initial value of Microsoft’s bid. (Microsoft Chief Executive Steve Ballmer upped his offer to $33 a share Saturday, before talks collapsed.) Yahoo shares are expected to fall sharply today.

People close to Redmond, Wash.-based Microsoft were adamant over the weekend that no meant no. But they didn’t rule out a return engagement if Yahoo offers to accept less than the $37 its board has demanded -- or Yahoo shares fall so low as to invite a proxy fight for a deal under $31.

In the meantime, these people said, Microsoft had a lot of work to do. The first priority appears to be stopping Sunnyvale, Calif.-based Yahoo from outsourcing some of its search-based advertising to Google Inc. Yahoo and Google have already conducted a limited trial.

In his kiss-off letter to Yahoo Chief Executive Jerry Yang, Ballmer spent about half his words criticizing a potential Yahoo-Google alliance, which he said would reduce competition and render Yahoo less desirable to any other potential partner.

Some Yahoo investors read Ballmer’s missive as a plea to them to try to block Yahoo’s management from getting involved with Google -- and thereby keep a light on for Microsoft’s return.


If Microsoft can’t swallow Yahoo and its vast audience whole, it still might be interested in pursuing a major deal to display ads on Yahoo pages. That would be one way to achieve some of the scale Ballmer has said the company needed to become a more formidable challenger to Google in online advertising.

In the fourth quarter of last year, Google had about 24% of the U.S. market for Internet advertising, according to research firm IDC. Microsoft and Yahoo combined had about 17%.

Ballmer last week listed other companies that could provide the reach it wants, including News Corp.’s MySpace social network and AOL, the beleaguered online unit of Time Warner Inc.

While Yahoo is in discussions to absorb AOL and take in Time Warner as a major investor, Microsoft has also had “surface level” talks about buying AOL, a person briefed on those discussions said Sunday.

Those discussions are apt to get more serious now, because AOL would give Microsoft a broader audience and solid technology for distributing ads -- and because buying it would cut off a means for Yahoo to defend itself from a renewed Microsoft takeover bid.

Analysts said Microsoft was sure to make more acquisitions. It could swallow up content companies or more technology firms like AQuantive, the online advertising services business Microsoft bought last year for $6 billion.


Microsoft can also do more with what it already has, starting with AQuantive, said Directions on Microsoft analyst Matt Rosoff.

“I don’t think they’ve done a lot of integration with AQuantive because they were waiting for the other shoe to drop with Yahoo,” Rosoff said. “I don’t think Microsoft has put its marketing or sales forces behind it.”

In Web search technology, Microsoft is far behind Google, analyst Barnicle said. But it might make good use of the know-how it bought with Fast Search & Transfer, a Norwegian search firm targeting big companies.

In a message to employees Saturday, Ballmer gave only the broad outlines of his advertising plans.

“Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo,” he wrote. “Ultimately, our goal is to build the industry-leading business in search, online advertising, media, and social networking.”

Without a game-changing purchase such as Yahoo, Barnicle said, Microsoft might do best by focusing on providing new types of online services instead of trying to out-Google Google by selling as much advertising as possible.


“Google has done a great job of building out a platform,” Barnicle said.

“Microsoft is coming from behind, but they have shown time and time again that they can come into a market where everyone counted them out -- like in the server market and the gaming market -- and really rally.”