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Microsoft Still Courting Yahoo's Search Business?

Microsoft-Yahoo

New rumors are bringing back some of the old names in what has become one of the most dramatic deal sagas to grip the tech industry in recent memory.

The latest round of leaks surrounding Yahoo (NASDAQ: YHOO) and Microsoft (NASDAQ: MSFT), appearing in The Wall Street Journal, suggests that the two companies are continuing their mating dance amid talks of a potential tie-up with a major third-party media company, likely either Time Warner (NYSE: TWX) or News Corp (NYSE: NWS).

The upshot: Microsoft is still interested in Yahoo's search business as a way to take on Google (NASDAQ: GOOG), but sources familiar with the discussions told the paper that a deal is unlikely to transpire.

The five months that have passed since Microsoft first announced its bid to buy Yahoo have left both companies wrangling with considerable strategic uncertainties.

Microsoft, a distant third in search and advertising, is passionate about becoming a dominant Internet force and presented the Yahoo acquisition as its best route to that end. But since Microsoft announced its offer, its stock has slid nearly 18 percent.

It's been much worse for Yahoo. Amid a whirlwind of bad press and a stock price that has been sliding steadily after initially spiking on news of the initial buyout bid, Yahoo's leadership is now fighting for control of the company. Billionaire investor Carl Icahn is trying to replace Yahoo's board of directors with his own slate in the hopes of engineering a transaction with Microsoft.

On the rumors that Yahoo and Microsoft might be talking again, Yahoo shares have rallied slightly in midday trading to $21.45. But that is well off the mark of $29.88, where the stock crested in February on the immediate excitement that followed Microsoft's offer.

Yahoo declined to comment for this report, but a person familiar with the company's thinking has told InternetNews.com that talks with Microsoft regarding a search tie-up continue at some level, but that "nothing is imminent."

Time Warner and News Corp. did not respond to requests for comment. A Microsoft spokesman declined to "comment on rumors or speculation."

The Journal report laid out a detailed timeline of the talks between Microsoft and Yahoo, including one meeting on May 17 when Yahoo actually offered to sell itself to Microsoft at $33 or $34 per share, two weeks after Microsoft pulled its bid off the table.

The kicker: In those early-May negotiations, Microsoft had raised its initial offer from $31 to $33 per share, but Yahoo held out for $37. Microsoft then walked away.

Following that breakdown, Microsoft became more interested in a partial acquisition, in which it would take control of Yahoo's search business. Last month, Yahoo rejected one such proposal that would have involved Microsoft buying an equity stake in Yahoo and boxing it into a 10-year exclusive deal.

Yahoo has since said that official talks over any form of acquisition deal with Microsoft have ended and has inked an ad deal with Google that it expects will infuse the company with up to $800 million in annual revenue.

Whether the two companies will ever strike a deal remains highly uncertain. If the Journal's timeline is to be believed, the search rivals have come close but repeatedly fallen short, in part due to a mutual suspicion about each other's intentions.

Yahoo has questioned Microsoft's commitment to a full acquisition, and Microsoft has charged Yahoo with taking steps to scotch a deal, such as a severance plan that could bring considerable expense to any acquirer.

[cob:Special_Report]The most recent near-miss was a meeting scheduled for June 30. Microsoft canceled that meeting, leaving Yahoo with the impression that it had been unable to find a third party to take a stake in what would be left of the company after Microsoft bought Yahoo's search business.

Previous ideas have involved Time Warner's AOL or News Corp.'s MySpace getting folded into Yahoo.

In the meantime, Yahoo has been lobbying for shareholder support as it girds for the proxy war with Icahn.

Yahoo will hold its annual meeting Aug. 1.