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WHAT'S NEWS| PAGE ONE | ||
News Corp., AOL Pursue Yahoo Deals
Consider Joint Bid;
Google Ad Pact
April 10, 2008; Page A1
Yahoo Inc. and Time Warner Inc.'s AOL are closing in on a deal to combine their Internet operations, a move aimed at thwarting Microsoft Corp.'s effort to acquire Yahoo, people familiar with the matter said Wednesday.
But Microsoft is recrafting its assault plan by talking with Rupert Murdoch's News Corp., publisher of The Wall Street Journal, about mounting a joint bid for Yahoo, people familiar with the matter said. Microsoft and News Corp. have yet to reach an agreement on joining forces but one person apprised of the plan described the discussions as serious. Such a deal would combine three of the biggest Internet properties: News Corp.'s MySpace, Microsoft's MSN and Yahoo.
Negotiating Leverage
The AOL-Yahoo deal under consideration would include the repurchase of some Yahoo shares at a price above Microsoft's offer. Taken together with a possible search advertising pact with Google Inc., the plan could give Yahoo an alternative to a Microsoft takeover -- although many analysts and investors believe Microsoft will ultimately win out. At the least, Yahoo's efforts could give it more leverage to negotiate a higher price from Microsoft.
Under the terms being discussed between Yahoo and Time Warner, the latter would fold its AOL unit into Yahoo and make a cash investment in return for about 20% of the combined entity, people familiar with the situation said. The deal, which wouldn't include AOL's dial-up access business, would value AOL at about $10 billion. As part of the deal, Yahoo would use the Time Warner cash and additional funds to buy back several billion dollars worth of its own stock at a price somewhere in the middle of the range between $30 and $40 a share, the people said.
![[Microsoft Bid]](http://web.archive.org/web/20080412000814im_/http://s.wsj.net/public/resources/images/it_money-handshake03062007140826.gif){kind=small}
MICROSOFT BIDS FOR YAHOOYahoo is also talking to Google about outsourcing search ad sales. On Wednesday, the two companies announced a test deal around search advertising.
Microsoft kicked off the battle for Yahoo nine weeks ago with a cash-and-stock offer then valued at $44.6 billion, or $31 a share. As of Wednesday, the deal is worth $29.24 a share because Microsoft's share price has declined. Yahoo shares closed at $27.77, up seven cents, or 0.25%, in 4 p.m. trading on the Nasdaq Stock Market Wednesday.
A joint deal by Microsoft and News Corp. to acquire Yahoo would create a huge one-stop shop for online advertisers and bring together some of the largest players in social networking, online news and email.
Microsoft and News Corp. have each discussed with Yahoo the possibility of a three-way alliance, according to one person familiar with the matter. This person says News Corp. might put up some cash as part of the deal.
But a three-way combination would also increase the complexity of any post-deal integration in areas such as combining computer systems, streamlining management and sorting out brand strategy. It might also be hard to drum up Yahoo shareholder support for such a more complicated scenario.
Yahoo has resisted Microsoft's advances, saying the offer was too low. Originally News Corp. held its own discussions about a partnership with Yahoo, and the two sides continued the talks in recent weeks. But people close to the companies say those discussions have stalled. One person familiar with the matter said News Corp. started talking to Microsoft several weeks ago.
Even if it reaches an agreement with AOL, Yahoo may have difficulty persuading its shareholders that the combination is more attractive than Microsoft's original proposal, which offers a more certain short-term financial return.
Any AOL deal would be taken to Yahoo shareholders for approval but wouldn't require approval from Time Warner shareholders, people familiar with the situation said.
Legg Mason Inc. portfolio manager Bill Miller, a big holder of Yahoo shares, said in an interview Tuesday that he was skeptical Yahoo could find an alternative palatable to shareholders. Another major Yahoo investor Wednesday said the AOL combination, along with the share repurchase and Google ad pact, likely couldn't match the original $31-a-share value of Microsoft's offer, at least in the short term.
Microsoft also has yet to fully win over Yahoo shareholders. While Microsoft has threatened to take its offer directly to shareholders via a proxy fight, some of Yahoo's major shareholders say they wouldn't support that step unless Microsoft sweetens its bid.
One person familiar with the matter predicted Yahoo's options will come to a head by early next week. Some in the Yahoo camp believe a threat by Microsoft Chief Executive Steve Ballmer Saturday to lower Microsoft's offer and its poor reception by some Yahoo shareholders have increased the chances that Yahoo's pursuit of alternatives will eventually trump an acquisition by Microsoft.
If consummated, the Yahoo-AOL discussions would unite two of the Internet's largest Web sites. One person involved in the discussions cautioned that there was still "a lot of work to do" before a final agreement between AOL and Yahoo.
Yet there is also incentive for Time Warner to complete a deal. It has been struggling to find a viable strategy for AOL for years. AOL has lost most of its value since it combined with Time Warner in 2000.
As its revenue from dial-up subscriptions declines, AOL has shifted its focus to advertising, but growth in that area has slowed recently. In the fourth quarter of 2007, AOL's advertising revenue growth slowed to 10%, from 13% in the previous quarter, and Time Warner has predicted it will be flat at best in the first quarter of 2008.
Yahoo and AOL have been broadening their businesses to sell online advertising across other Web sites. Such efforts are in part a recognition that much of the growth momentum online has passed to younger players such as Facebook Inc.'s social-networking site and Google's YouTube video-sharing service.
Responding partly to such trends, Microsoft wants to combine with Yahoo to better challenge Google. Mr. Ballmer's letter gave Yahoo directors three weeks to reach a friendly deal before Microsoft would go hostile, implying that Microsoft would lower its bid in that case. In a letter Monday responding to Mr. Ballmer, Yahoo directors called his ultimatum "counterproductive."
Yahoo's sites had the most U.S. visitors in February, with 137 million, while AOL's 109 million visitors put it fourth behind Google and Microsoft, according to research firm comScore Inc. News Corp.'s Fox Interactive Media Internet unit was fifth with 84 million U.S. visitors.
The announcement of the Yahoo-Google test Wednesday turns up the pressure on Microsoft. A tie-up between Yahoo and AOL is not contingent on the success of the test, people close to the discussions said. Google already handles search advertising sales for AOL and owns a 5% AOL stake.
Yahoo said its test with Google will last up to two weeks and involve no more than 3% of Yahoo's Web search queries. The test, which will start as early as next week, is designed for Google and Yahoo to evaluate the revenue potential of a broader search ad sales outsourcing arrangement, according to people familiar with the matter. Yahoo views the latest test partly as a way to demonstrate its belief that it is worth more than Microsoft has offered, one of the people said.
"Yahoo will be testing Google's AdSense for Search service, which will deliver relevant ads alongside Yahoo's own natural search results," said Google in a statement. "This is only a limited test and does not necessarily mean that Yahoo will join the AdSense program."
Analysts have predicted outsourcing its search ads to Google would boost Yahoo's cash flow, since Google's system generates significantly more revenue for each search query than Yahoo does. Under such an arrangement, Yahoo would likely garner a majority of the revenue and Google would keep the rest as a commission.
But antitrust experts say any broader ad pact between the two would likely face intense regulatory scrutiny, given the companies' significant shares of the Web-search and online-advertising markets.
"Any definitive agreement between Yahoo and Google would consolidate over 90% of the search advertising market in Google's hands," said Microsoft in a statement. "This would make the market far less competitive."
Microsoft's statement added, "Our proposal remains the only alternative put forward that offers Yahoo shareholders full and fair value for their shares."
Citigroup Global Markets analyst Mark Mahaney, in a February research note, estimated that Yahoo could boost its cash flow more than 25% annually by outsourcing all its search advertising to Google. Yahoo executives considered such a maneuver as part of a strategic review last year, according to people familiar with the matter, but Yahoo Chief Executive Jerry Yang in October signaled that they had decided against it.
"We believe having a principal position in both search and display advertising is critical to creating...long-term shareholder value," Mr. Yang told analysts during Yahoo's earnings conference call in October.
Several factors may have spurred a change of heart toward Google, including the Microsoft offer and a 2008 revenue outlook considered tepid by many investors.
Write to Merissa Marr at merissa.marr@wsj.com
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