Microsoft Still Vying for Yahoo

Microsoft and Yahoo made it clear that a potential partnership is still on the table. In a statement issued yesterday, Microsoft said it "has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo.

"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 that may take place with Yahoo or discussions with shareholders of Yahoo or Microsoft or with other third parties," according to the statement.

A UBS analyst said that an acquisition may be on the horizon as it is in Microsoft’s best interest to acquire Yahoo on friendly terms.

"We continue to maintain our view that there is no other company that needs Yahoo as much as Microsoft and Microsoft does not have a compelling plan-B without Yahoo," Collins Stewart analyst Sandeep Aggarwal wrote in a research note last week.

The partnership will most likely focus of search advertising. Yahoo could outsource to Google, part of its search ad sales. An alternative might be for Microsoft to acquire Yahoo’s search and search-advertising business and leave Yahoo independent but smaller. Display advertising and Internet media businesses would be the search engine’s primary focus.

If Yahoo does not reach a deal with either Google or Microsoft, it may be pulled into a proxy battle with shareholder activist Carl Icahn and his hand-picked slate of directors. Icahn launched a proxy campaign last Thursday to replace Yahoo’s board with a new slate of directors who would reopen talks with Microsoft. Icahn believes Yahoo’s board acted “irrationally” by refusing Microsoft’s $47.5 billion bid.

Microsoft had increased its bid for Yahoo from $31-per-share to $33-per-share but took their offer off of the table when Yahoo held out for $37-per-share. It is believed that Icahn plans to move toward a possible alliance with Google. Yahoo-Google talks have disillusioned some Yahoo shareholders as a deal with Google could constitute antitrust problems and therefore leave Yahoo at a financial disadvantage.

Jonathan Yarmis, an analyst at AMR Research believes, "A deal with Microsoft - even a partnership - would provide Yahoo with a graceful exit from Google.” Some shareholders believe that Icahn’s bid is positive overall as it will bring shareholder value to Yahoo, which has struggled against Google for online revenue.