Yahoo running out of options

Sought after
SOUGHT AFTER: Yahoo CEO Jerry Yang may not be leading an independent company for long.
(Tony Avelar / AFP / Getty Images)
Los Angeles Times Staff Writers

It looks as if Yahoo will be dragged down the aisle by its suitor, Microsoft, no matter how loudly Google speaks its piece.

On Monday, other potential mates with deep pockets denied they would try to beat Microsoft Corp.'s $44.6-billion offer even as investment bankers tried to help Yahoo remain unhitched.

But Yahoo Inc.'s board of directors can’t simply say no to such a strong offer without providing a better alternative, analysts said, and few options have emerged that wouldn’t outrage shareholders or antitrust regulators.

“Yahoo does not want this to happen,” analyst Charlene Li of Forrester Research said.

“But I’m not sure it has much of a choice.”

The company that Microsoft and Yahoo fear most in the Internet business -- Google Inc. -- is trying to quash the deal by also courting Yahoo.

On Friday, the day Microsoft Corp. made its bid public, Google Chief Executive Eric Schmidt called Yahoo CEO Jerry Yang to offer help in fending off the Redmond, Wash.-based software giant, according to a person familiar with the discussion. The companies, which are both based in Silicon Valley, have discussed having Google run Yahoo’s search-engine business.

Although Yahoo insiders might have more cultural affinity with their Silicon Valley neighbors, experts said combining the Web’s two biggest search businesses could be a hard sell to regulators worried about competition.

“To go from three significant players down to two, with one having around 75% market share, maybe more -- I can’t believe the antitrust people wouldn’t block that,” said Robert Lande, an antitrust law professor at the University of Baltimore and a longtime Microsoft watcher.

Although rival bidders could still emerge, several potential suitors said they didn’t plan to compete for Yahoo against Microsoft, which can afford to pay top dollar thanks to its cash hoard from computing software such as its operating systems and Office suite.

News Corp. Chairman Rupert Murdoch told analysts during an earnings call Monday that his company was “definitely not going to make a bid for Yahoo.” Cable TV giant Comcast Corp. wants to extend its online reach, but analysts said the price was probably too rich. NBC Universal Chief Executive Jeff Zucker dismissed a rumor during a conference call with JPMorgan analysts and their clients, saying NBC “was not in play,” according to two people on the call. NBC Universal declined to comment.

Warning that deliberations could take “quite a bit of time,” Yahoo said its directors were considering the Microsoft offer and other options, including remaining independent. Analysts said those options included soliciting a rival bid, selling the company in pieces or dragging its feet until Microsoft sweetened the offer.

“The likelihood is that [Yahoo] will not find another bidder as aggressive as Microsoft, but they have a fiduciary responsibility to check,” Stanford Group Co. analyst Clayton Moran said.

Analysts said Microsoft cleverly calculated its bid -- the $31 a share offered was 62% more than the stock’s most recent closing price -- to make it as tough as possible for Yahoo to fight for its independence or secure a higher price.

Turning Microsoft down flat -- the “just say no option” -- is fraught with risk because it all but guarantees a drawn-out fight that would end months from now in an acrimonious vote at Yahoo’s annual meeting, said Michael J. Montgomery, founder of Santa Monica-based investment bank Montgomery & Co.

Yahoo insiders, including founders Yang and David Filo, control only about 5% of the company’s shares, while mutual funds and other institutional investors hold about 70%. That leaves Yahoo much more vulnerable to Wall Street pressure than Dow Jones & Co., which still succumbed to a News Corp. bid despite the controlling stake held by its founding family, the Bancrofts.

Some analysts said the Microsoft bid was low because even though Yahoo stock was trading in the teens last week, it had hit the mid-$30s as recently as October. They also pointed to Yahoo’s stakes in Yahoo Japan Corp. and China’s Alibaba Group Holding, which have a total market value of more than $12 a share.

Microsoft’s bid could go as high as $35 a share, Moran said.

“This could play out over several acts, and these are unpredictable times, but at the end it all leads to Microsoft winning,” said an investment banker tracking the matter who insisted on anonymity because he could become more closely involved. “This is a really strong offer.”

Microsoft CEO Steve Ballmer told Wall Street analysts at a previously scheduled presentation Monday, “We trust that the Yahoo board and Yahoo shareholders will join with us quickly” and approve the current offer.

Google is trying to spoil Microsoft’s shotgun wedding. What form its assistance might take is unclear. Google couldn’t bid for Yahoo because of antitrust constraints, but it could offer help in recruiting a bidder or a team of bidders. It also could guarantee advertising revenue in return for Yahoo’s outsourcing its search advertising business to Google.

Analysts have called for Yahoo to ditch its search ad system and instead use Google’s system in exchange for a split of the revenue.

Yahoo had resisted surrendering its No. 2 position in search advertising, calling it a crucial part of its long-term strategy. But it has faced rising pressure from Wall Street to accelerate its slowing growth.

“Alternatives are being explored,” said the person familiar with the conversation between Schmidt and Yang. “Nobody has a definitive list, but people are looking at all sorts of things.”

Representatives of Yahoo and Google declined to comment.

A deal between Google and Yahoo would give Yahoo more income than its current homegrown ad sales, and it would allow Yahoo to argue to regulators that a Microsoft takeover would improperly combine three of the top search ad providers.

But Microsoft is preparing antitrust objections to such an arrangement because of Google’s involvement. Ballmer said Monday that combining with Yahoo would increase competition by creating a strong No. 2 player in search and online advertising. Google reaches 80% of the U.S. Internet audience, and Microsoft and Yahoo together would reach nearly 74%, according to research firm IDC.

Google currently has more than 32% of the U.S. online advertising market, and the combined company would have nearly 23%, IDC said.

The jousting continues the animosity between Microsoft and Google, which have competed for advertising partnerships with companies such as AOL and Facebook Inc. The rivalry heated up in April, when Google won the bidding for online advertising company DoubleClick Inc.

Microsoft lobbied hard against the deal, complaining that it would hurt competition in Internet advertising, but U.S. regulators approved it and their European counterparts appear likely to do the same.

“It appears that Google’s involved in payback for the DoubleClick mischief,” said Scott Cleland, a Google foe and president of Precursor, a technology research and consulting firm. “But shining bright lights on this market will only educate the world about how dominant Google is.”


Times staff writers Jim Puzzanghera, Dawn C. Chmielewski, Meg James and Alex Pham contributed to this report.

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