As pressure mounts on Yahoo, Microsoft eyes new tie up

August 26, 2008
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, WASHINGTON  – With Yahoo facing pressure from a corporate raider, the Internet giant has reopened discussions on a tie-up with Microsoft, but for a new deal that would probably not be an outright takeover.

The two firms said over the weekend that they were exploring new options, two weeks after Microsoft withdrew its offer to acquire the struggling Internet pioneer.

The news came after last week’s announcement by billionaire Carl Icahn that he had acquired a big stake in Yahoo and would seek to unseat its board in an effort to reopen merger talks with Microsoft, which Icahn said had been "completely botched."

Microsoft said in a statement Sunday that in light of developments since it backed out of takeover talks, the software giant "is considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo."

The Redmond, Washington-based firm added: "Microsoft is not proposing to make a new bid to acquire all of Yahoo at this time, but reserves the right to reconsider that alternative depending on future developments and discussions."

Microsoft offered to buy Yahoo for 44.6 billion dollars in stock and cash on January 31, but withdrew the offer on May 3, saying Yahoo refused to budge despite the software giant upping its offer to nearly 50 billion dollars.

Yahoo said in a separate statement that it has confirmed with Microsoft "that it is not interested in pursuing an acquisition of all of Yahoo at this time."

Yahoo said its board members "continue to consider a number of value-maximizing strategic alternatives for Yahoo, and we remain open to pursuing any transaction which is in the best interest of our stockholders."

Greg Sterling, analyst at Search Engine Land, said the tie-up could bring together Yahoo’s and Microsoft’s Internet search and advertising operations in an effort to take on sector leader Google.

"Yahoo is back at the table — assuming that it is — no doubt because of Carl Icahn’s proxy pressure on Yahoo’s board and the fact that a number of institutional Yahoo shareholders are angry that there wasn’t a deal with Microsoft," Sterling said.

Jeffrey Ham at Briefing.com said the two firms have an interest in joining forces to take on Google.
"Microsoft’s interest in improving and expanding its online and advertising business reflects its commitment to challenging Google for market share," he said.

"A marriage of Microsoft and Yahoo was considered a strong move in that direction. If Microsoft can obtain the specific assets it was seeking all along, without the headache of completely merging operations and culture, it may find itself better positioned in the long run."

Icahn said in an open letter last Thursday that Yahoo "completely botched" merger talks with Microsoft and that he is amassing Yahoo stock to oust the board of directors at an annual shareholders meeting on July 3.
Yahoo responded that Icahn was misinformed.

"Unfortunately, your letter reflects a significant misunderstanding of the facts about the Microsoft proposal and the diligence with which our board evaluated and responded to that proposal," Yahoo board chairman Roy Bostock wrote in an open response to Icahn.

Microsoft’s initial takeover bid unveiled in February would have brought together the world’s biggest software firm and second-largest Internet search firm in an effort to better compete with Google, which has been gobbling up an increasing share of the lucrative Web search market.

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