Shift in Web Ads Drives Deal Pursuit; Board Meets Today
Yahoo Inc.'s directors meet Friday to discuss alternatives to a Microsoft Corp. takeover, with many insiders still seeing a Microsoft deal - without the participation of News Corp. - as the most likely outcome.
Behind the battle over Yahoo is a scramble by Internet and media giants to capture the flood of advertising dollars moving online and block Google Inc. from extending its Web-search-ad domination.
Aside from Microsoft's solo bid Yahoo's directors will likely discuss a plan under which Time Warner Inc. would fold its AOL unit into Yahoo.Another option for Yahoo is a joint deal with Microsoft and Rupert Murdoch's News Corp., owner of The Wall Street Journal.
Microsoft and News Corp. talked about options involving Yahoo as early as last year, people familiar with the talks said. Now, News Corp. is discussing joining forces with Yahoo and Microsoft to combine News Corp's MySpace, Microsoft's MSN and Yahoo into a separate company, people familiar with the talks said.
But people close to Microsoft discounted the likelihood that it would bring News Corp. into a Yahoo deal. Meanwhile, the potential AOL-Yahoo deal has encountered skepticism from some major Yahoo shareholders, according to people familiar with the investor's thinking.
At the least, the jockeying could leave Yahoo with greater leverage to extract a better price from Microsoft. Yahoo shares rose 82 cents, or 2.95%, to $28.59 in 4 p.m. Nasdaq trading Thursday, as investors welcomed the apparent emergence of alternatives.
Many analysts and investors say Microsoft could probably complete the deal if it sweetened the unsolicited cash-and-stock offer it extended to Yahoo on Jan. 31. That offer, originally valued at $31 a share, or $44.6 billion, was worth $29.34 a share, or $42.2 billion, based on Microsof's share price Thursday. A central question is whether Microsoft is willing to raise its bid.
Yahoo's directors aren't expected to make any big decision Friday about their direction. One person familiar with the matter said Yahoo's options are likely to come to a head next week.
Among the players battling over Yahoo, there's a common assumption: Major brand advertisers are gearing up to move big chunks of money from traditional ads including TV commercials and glossy magazine spreads to online outlets such as video-sharing services and Web sites for women. Although online ads garnered only an estimated 7% of total U.S. advertising dollars last year, Internet companies believe the percentage will increase sharply as Americans ratchet up their daily use of the Web and advertisers gain confidence in the medium.
Google handily won the last phase of online competition focused on ads tied to Web searches. Those ads account for roughly 40% of the U.S. online ad market. But Google and others have turned their sights to display advertising, such as banner ads and video ads, where they expect the next phase of growth to kick in. Such ads currently account for about 30% of U.S. Internet ad dollars.
The Internet's old-guard portals-Yahoo, MSN and AOL have all lost share of the U.S. online-advertising market since 2004, according to estimates from eMarketer Inc. Google's share, driven by its domination 'of search advertising, has jumped at their expense to 28.4% last year from 13.1% in 2004. Looking for growth, the old guard has accelerated efforts to sell ads on partner sites in exchange for commissions, using ad platform systems they have bought and built.
Google's focus on display advertising is taking shape. It recently closed its acquisition of Internet ad-services company DoubleClick Inc. and is trying to take advantage of the popularity of its You Tube video site.
Yahoo is an attractive partner or takeover target because it has the most U.S. visitors, with 137 million in February, according to research firm comScore , Inc. Google, Microsoft, AOL, and News Corp.'s Fox Interactive Media Internet unit follow in the second through fifth places.
Whether called "portals" or "social networks," sites such as Yahoo, MSN, AOL and News Corp.'s MySpace are points of entry to the Internet for consumers. Pooling their resources could bring economies of scale and better attract advertisers. Microsoft's unsolicited pursuit of Yahoo is forcing other players to review their tie-up strategies.
In a Saturday letter to Yahoo director,s, Microsoft Chief Executive Steve Ballmer threatened to go hostile in three weeks if Yahoo didn't agree to a friendly deal, implying that Microsoft wou drop the price in that case. Some major Yahoo investors who believe Yahoo is worth more than Microsoft original $31-a-share offer say the threat to lower the price was counterproductive, giving Yahoo more opportunity to find viable alternatives.
People involved in the negotiations described an unusual level of uncertainty on everyone's part about what is real and what may be smoke and mirrors. It remains unclear even to the participants whether some of them are being used as stalking horses. .
The scenario that News Corp. and Microsoft are discussing would combine MSN, Yahoo and MySpace in an effort to dominate the display-advertising market as an offset to Google's dominance in search adverstising.
The latest Microsoft-News Corp. discussions got more serious after News Corp.'s own discussions with Yahoo-about trading MySpace and some other Web sites for a stake in the Internet company-fell apart because Yahoo wouldn't agree to a $10 billion to $15 billion valuation for the News Corp. properties, according to people familiar with the talks.
Microsoft and News Corp. last year had discussed a broad advertising pact that fell apart when News Corp. chose other partners for an online video service called Hulu, according to a person familiar with the situation.
Later last year, the two companies started to talk about options for Yahoo, according to a person familiar with Microsoft's thinking. The plan the two companies discussed, according to this person, was for Microsoft to operate Yahoo's search and advertising technology, while News Corp. would contiol everything else, including Yahoo's broad array of online media properties.
A partnership with News Corp. could allow Microsoft to focus on the software and technical underpinnings of online services while offloading content and information-historically weak points for the software company-to News Corp., which specializes in that realm. "All Microsoft cares about is search and the ad engine," one person familiar with the situation said.
The partnership could also soothe the concerns of some Microsoft executives who balk at swallowing Yahoo whole. Microsoft has historically eschewed large acquisitions.
Nonetheless, people close to Microsoft said the company, while willing to discuss alternatives, still intends to do the deal alone. "We don't need the help," one person said.
People close to News Corp., say the company has several reasons for wanting to stqy involved in a deal. News Corp. continues to weigh how it might sell MySpace, which faces steep competition. The site continues to grow overall, but some executives feel its growth may have peaked.
Google and News Corp. have a pact that allows Google to sell search advertising on MySpace. While News Corp. Chairman Murdoch recently said News Corp. is "very happy to be in the Google camp," some within the company believe that News Corp. could do better.
Yahoo itself has been talking with Google. On Wednesday, the two companies announced a two week test in which Yahoo will carry Google search advertisements next to a small portion of its Web search results. Yahoo and Google are studying a broader search advertising pact, which could allow Yahoo to demonstrate that it is worth more than Microsoft has, offered, according to people familiar with the matter. Antitrust experts have said such a broader pact would likely raise regulatory issues.
The deal Yahoo is discussing with Time Warner would value AOL at around $10 billion. That valuation excludes AOL's fading dial-up Internet-access business, which had complicated negotiations with potential partners in years past.
Time Warner Chief Executive JeffBewkes said earlier this year that he would split the dial-up business from AOL's more attractive advertising and portal businesses-a move seen as a possible precursor to the sale of both businesses.
While AOL's position as a Web destination has eroded-reducing the value of a potential tie-up with Yahoo-AOL has quietly built a strong online advertising brokerage.
That business could give Yahoo ammunition to argue that a deal with AOL would create substantial value. For Yahoo Chief Executive Jerry Yang, the advantage of such a deal over a transaction with Microsoft is that it would allow Yahoo to maintain its independence. He would also likely remain in control of the company he co-founded.
AOL has little to lose in negotiating with Yahoo. The Internet unit remains the biggest headache for Mr. Bewkes, who is under pressure to boost the company's sluggish share price. Time Warner's weary investors are eager to see an AOL solution after the disastrous merger in 2001 and subsequent failed attempts to reinvent the Internet company.
Time Warner has explored combining AOL with other companies before, most seriously in 2005 when it held discussions with both Microsoft and Yahoo. Time Warner ultimately opted for an eleventh-hour deal struck with Google, in which Google bought a 5% stake inAOL that valued the unit at $20 billion.
By: Kevin Delaney, Matthew Karnitschnig, & Jessica E. Vascellaro; Merissa Marr, Robert A. Guth and Nick Wingfield contributed to this article
Wall Street Journal; April 11, 2008
