Pressure is on Yahoo For Alternatives
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NEW YORK/SAN FRANCISCO -- Yahoo (NASDAQ: YHOO) is facing pressure to find an alternative strategy to Microsoft'S (NASDAQ: MSFT) $47.5 billion takeover offer after the software maker walked away over a disagreement on price.
Yahoo shares fell by more than 20 percent in pre-market trading on Monday, but had eased back up by about 3 percent to $23.50, down by 17.7 percent, or $5.03 off the price, following the end of negotiations with Microsoft over the weekend.
The drop could be softened if Wall Street believes Yahoo Chief Executive Jerry Yang has another strategy up his sleeve, analysts said.
Yahoo is likely to push for an advertising partnership with Web search leader Google Inc, sources familiar with the matter said. A tie-up with Google, seen as a big winner from the end of Microsoft-Yahoo talks, should help boost Yahoo's operating performance in the near term.
"It's time to get a move on with Google," said Jeffrey Lindsay, analyst with Sanford C. Bernstein. "Let's hope they weren't bluffing."
Yahoo is also still considering a deal with another Internet media and advertising major, such as Time Warner Inc's AOL, people familiar with the discussions said.
But Yang and the company he helped create could face a flood of shareholder lawsuits or other actions if nothing materializes.
"There are two things that could support the stock: the potential for Microsoft to return and the potential to do a Google deal," said Clayton Moran, analyst at Stanford Group.
Moran said Yahoo shares could fall to the mid- to low-$20 range on Monday from their $28.67 close last week. Other analysts said it could slip closer to $19.18, where it closed on January 31, a day before Microsoft made its offer public.
Microsoft shares are likely to rise on Monday, with its investors relieved that Chief Executive Steve Ballmer didn't shell out billions more for Yahoo, analysts said.
Microsoft on Saturday sweetened its initial $31-per-share offer for Yahoo to $33, but then withdrew from the talks when Yang dug in for a price of $37.
Yang maintains that even the higher offer did not value Yahoo properly for its investment in search technology, its prominence in online display advertising and other assets. On Sunday, he sought to shore up that sentiment among employees.
"We have a spirit and a culture that is uniquely Yahoo," Yang said in an email to staff that was viewed by Reuters. "Staying true to who we are has helped us pull through the recent uncertainty we've faced."
While some Yahoo investors hoped it could wrest a price of $35 per share from Microsoft, a dissident shareholder said he would challenge Yang and the board over the collapse of talks.
"Shareholders didn't even get a chance to vote on the deal, but the board negotiated on our behalf and not in good faith," Eric Jackson, who leads a group of investors who collectively own 2 million Yahoo shares, told Reuters.
He said he would urge shareholders to withhold votes from the company's directors this year. Bernstein's Lindsay estimates Yahoo could be worth up to $35 per share with a Google deal, and even $37 with more job cuts, but that drops to $25 per share if no partnerships are in the offing.
Yahoo has conducted tests with Google to outsource some of its search listings to its arch-rival. It has also held talks in tandem with AOL and Rupert Murdoch's News Corp.
A source familiar with the matter said on Sunday that the News Corp talks had cooled in recent weeks.
"It increasingly appears like Yahoo will pursue a Google search partnership," said Moran, who said he still favored a Microsoft buyout. "Given Google's position (in the market), a partnership with them cedes control and limits the long-term value creation for Yahoo."
Ballmer portrayed Yahoo's options as particularly stark in a letter to Yang detailing his reasons for pulling back, and suggested any Google tie-up would preclude a Microsoft deal.
Microsoft and Google are increasingly competing on the same turf, such as Web-based applications, email and messaging. The proposed Yahoo purchase was meant to create a fiercer rival to Google and challenge its hold on Internet advertising.
"The real winner in all of this seems to be Google," said Canaccord Adams analyst Colin Gillis. "There's going to be no powerful number two" in the Web market, he said.
Gillis rated Yahoo a "buy" with a $35 price target before the deal talks with Microsoft collapsed. "We were very clear that was not based on fundamentals," he said.
Ballmer also warned Yahoo that it would give up its relationship with advertisers by coordinating with Google and could lose some of its best engineering talent.
Some analysts disputed that idea, saying Yahoo's operating results would certainly benefit from a Google partnership.
Other Google partners, including IAC/InterActiveCorp's Ask.com, have structured deals that keep them in control of their advertiser ties, Bernstein's Lindsay said.
By Michele Gershberg and Anupreeta Das. The version updated to add Yahoo's stock price from this morning.