Yahoo-Microsoft Talks Break Down (Again)

UPDATED: Yahoo has announced that after more than four tortured months of stop-start acquisition talks with Microsoft, the deal’s off.


Source: Reuters

The embattled Web pioneer said today that all discussions with Microsoft (NASDAQ: MSFT) about any type of acquisition — either an outright purchase or a partial sale — have ended.

In its statement, Yahoo (NASDAQ: YHOO) spoke only of the acquisition talks ending, but did not rule out the possibility that some form of limited ad alliance might still be in the cards.

Yahoo also announced a major ad deal today with its rival Google (NASDAQ: GOOG) reportedly expected to add some $800 million in annual revenue to Yahoo’s coffers.

Yahoo said that the acquisition talks had broken down at a meeting that took place on June 8, which Yahoo Chairman Roy Bostock and the rest of its board attended.

Microsoft came out with its own statement, reiterating that it was not interested in reopening talks for a purchase of the entire company. Microsoft said that they were continuing to look at an alternative transaction, which “remains available for discussion.” Microsoft declined to elaborate on its statement.

Nevertheless, the news will doubtless come as a blow to Carl Icahn, the billionaire investor who is trying to take control of the company through a proxy war in an attempt to engineer a sale to Microsoft. Icahn could not be reached for comment.

For the past two weeks, Icahn and Yahoo have been engaged in a war of words over the deal — or lack of one — between Microsoft and Yahoo. Icahn accused Bostock of mismanaging the company and putting into place reckless policies that drove Microsoft away. Bostock fired back that Icahn has no credible plan for Yahoo save for a sale to Microsoft, ignoring the fact that Microsoft had taken its bid off the table.

Yahoo will hold its shareholders’ meeting on Aug. 1.

Icahn has said that if he cannot broker a deal with Microsoft, he would pursue a transaction with Google to handle Yahoo’s search advertising.

As one of its “strategic alternatives” to a sale to Microsoft, Yahoo conducted a three-week trial in April where Google took on a small portion of Yahoo’s search ads. Both companies said that the experiment was a success, and rumors have surfaced that the announcement of a more permanent deal is imminent.

But Charlene Li, vice president and principal analyst at Forrester Research, looks at any combination with some skepticism. “Any deal that they would do with Google would have tremendous regulatory hurdles,” she told

Taken together, the two companies command more than 80 percent of the search market, so a partnership would have to be delicately structured to withstand regulatory scrutiny.

At the June 8 meeting, Yahoo said that Microsoft’s representatives “stated unequivocally that Microsoft is not interested in pursuing an acquisition of all of Yahoo, even at the price range it had previously suggested.”

Talks broke down in May when Microsoft raised its bid to $33 per share, and Yahoo held out for $37. Icahn recently called on Yahoo to publicly offer itself to Microsoft for sale at a price of $34.375.

Yahoo shares fell 10 percent today on the news to close at $23.52.

Throughout this process, analysts have generally perceived Yahoo as desperate to avoid a sale to Microsoft, and today’s events did little to convince them otherwise.

“It’s not a surprise that they [the follow on talks] haven’t gone anywhere,” Charlene Li said “I think Microsoft would have liked to continue the talks but Yahoo wasn’t interested.”

Rob Enderle, principal analyst at The Enderle Group, offered a more dramatic appraisal. “I’m convinced that Yahoo’s running with scissors [by rejecting Microsoft’s advances],” he told

Many investors agree. Several shareholders’ groups have filed suit against Yahoo’s board, claiming that it breached its fiduciary duty in how it responded to Microsoft’s bid. The flash point in that debate is the generous severance packages that provide up to two years’ salary for employees who get laid off or quit with “good reason” following a change in control of the company. Attorneys for two groups have asked a judge to fast-track the trial in the hopes that the severance packages would be declared unlawful before the annual meeting.

But all that legal wrangling could be a moot point, given that Microsoft CEO Steve Ballmer’s attention seems to have moved on.

“I doubt that Microsoft is interested anymore anyway,” Enderle said.

That is evidenced by several announcements surrounding Microsoft’s own search technologies and products since the attempt to acquire Yahoo fizzled in May.

Besides the recent releases of Windows Search 4 and an updated version of Live Search for Windows Mobile, Microsoft also announced last month Live Search Cashback, which will pay advertisers and consumers for looking at ads and purchasing things online using the company’s search service.

Additionally, though, even if Microsoft still has plans that include Yahoo, CEO Steve Ballmer is a canny poker player who knows that nothing can take place right now, Enderle said.

“Until the proxy fight is over, it’s unlikely that Microsoft and Yahoo would be able to do anything.”

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