Yahoo Seen in News Corp. Talks But Analysts Dubious
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Yahoo is in talks on a possible deal with News Corp., but analysts said an alternative was unlikely to emerge to rival Microsoft Corp.'s bid for Yahoo, now valued at $42.1 billion.
News of the talks to combine their Web properties was first reported by the Silicon Alley Insider blog on Monday, which said one proposal would involve a cash infusion from Rupert Murdoch's News Corp. and an unnamed private equity fund.
A source familiar with the situation said Yahoo and News Corp. were talking about a deal but could not confirm any details.
The Wall Street Journal reported that a deal being discussed would give News Corp. more than a 20 percent stake in Yahoo. It said the talks valued News Corp.'s MySpace online socializing site at between $6 billion and $10 billion.
"Any options other than Microsoft are all ... fraught with serious consequences," said Sanford C. Bernstein analyst Jeffrey Lindsay. "The management has left it to so late in the day to really find any alternative. They have basically backed themselves in the corner."
Analysts say alternatives such as a News Corp. partnership might have long-term strategic benefits for Yahoo but would not give its shareholders an immediate investment return like Microsoft's $31-a-share buyout offer.
Thus, if the Microsoft bid were to fall through, analysts expect Yahoo shares to plunge. The stock was trading below $20 a day before Microsoft's proposed $31 offer was made public.
"It is hard to imagine that Rupert would be willing to put enough cash in the deal to make it interesting to Yahoo shareholders," RBC Capital Jordan Rohan said.
"Yahoo stock would settle out at $15 share depending on how much cash was in the picture," Rohan said, reflecting a widely held sentiment on Wall Street that Microsoft's price has raised an insurmountable hurdle to alternative bidders.
Yahoo shares closed about 1 percent higher at $29.88 and Microsoft rose 2.2 percent to $28.96. Yahoo continues to trade at a 2 percent premium to Microsoft's half-cash and half-stock offer, indicating investors are expecting a higher bid.
Short-sellers also appear to have backed away in the last few days from bets against a Microsoft-Yahoo deal, according to data from Data Explorers, which tracks securities lending.
When Microsoft's bid was made public on February 1, the amount of Yahoo shares loaned out to short sellers and others spiked, but it has been falling since last Tuesday. Stock lending data is often viewed as a proxy for short-selling interest because "shorts" are typically the biggest borrowers of stock.
[cob:Related_Articles]On February 1, about 1.98 percent of Yahoo's market capitalization was loaned out, according to Data Explorers. That figure rose to 2.72 percent on February 5, but as of February 11 it was back down to 1.95 percent.
On again, off again
Yahoo on Monday turned down Microsoft's bid, saying it did not properly assess the worth of the Web pioneer's wide audience, online advertising investments, cash-generating ability and growth prospects of overseas holdings.
Microsoft responded by saying its offer was "full and fair" and it reserved the right "to pursue all necessary steps," but it did not give details on what it would do next.
On Wednesday, Yahoo CEO Jerry Yang took the company's case for remaining independent to shareholders, sending a letter that largely repeated arguments made in a regulatory filing and a letter to employees earlier this week.
Many analysts expect Microsoft to sweeten its bid to at least $35 a share and as much as $40 a share.
That worries some shareholders concerned about when the deal would pay off. Money Manager Bob Olstein, who owns about 1 million Microsoft shares, is urging the software company to make it an all-cash deal and resist pressure to raise its bid.
"Under no circumstances should you raise your price," Olstein said in a letter to Microsoft Chief Financial Officer Chris Liddell, dated Feb. 12 and made public on Wednesday. "We believe your recent offer for Yahoo is materially above Yahoo's value as an independent company."
Olstein calculated that an all-stock deal would dilute Microsoft earnings by 19 cents per share, compared with a more modest dilution of 7 cents per share for an all-cash deal.
Microsoft, which has $21.3 billion of cash on its balance sheet, would have to borrow more debt for an all-cash offer.
Murdoch has held on-again, off-again talks with Yahoo in the past year. He told analysts and reporters on a conference call last week that News Corp. was not interested in bidding for or pursuing any transaction with Yahoo.
News Corp. and Microsoft declined to comment on Wednesday. Yahoo also declined to comment and reiterated the company's position that its board continues to explore its options.
News Corp. shares fell 0.6 percent to $19.25 on the New York Stock Exchange.