Kara Swisher

Recent Posts by Kara Swisher

Could Microsoft Get Control of Yahoo Without Buying It Whole? Investors Think So.

So when will Microsoft (MSFT) and Yahoo (YHOO) really start talking again?

Much sooner than later, if investors have their way.

While the pair have not had any substantive new talks as yet, despite reports they had, BoomTown would expect pressure from those shareholders (if not a dose of sanity in the face of the Google juggernaut) will bring them to the table within the next week.

While the software giant has no interest in buying all of the Internet portal, under a scenario that was first suggested to Microsoft by major Yahoo shareholders–including activist investor Carl Icahn, who is waging a proxy war against the company–a more substantial search deal could effectively give Microsoft control over Yahoo.

How?

By beefing up all the terms of the partial search-ad deal Microsoft proposed recently, a deal it lost to Google (GOOG), especially the possibility of buying one-third or more of the company from investors at a price of $30 to $32 a share.

If Microsoft upped that stake, combined with the shares of other major investors, that would essentially give it and them a lot of control over the destiny of Yahoo.

That would mean, of course, the dumping of the much-touted Google deal Yahoo agreed to only two weeks ago.

Microsoft is contemplating the idea seriously, sources said, and its execs are busy preparing a new search-ad offer, although the company has not held any formal renewed talks with Yahoo thus far.

But, if this idea gains traction, Yahoo sources said there is little the company’s board could do to resist it and, in fact, key board members are also now interested in it.

Buying such a large stake in Yahoo is a bold move, of course.

Previously, as I posted two weeks ago and as was outlined again in a letter about a Microsoft search-ad offer released today by Yahoo, Microsoft had offered to buy 16% of Yahoo for $8 billion at $35 a share.

Microsoft was mighty irked by getting kicked to the curb by Yahoo, which has since insisted the Google deal was superior.

Not to Wall Street. Since then, Yahoo shares have dipped even lower, to about $22 a share today.

So if something does not happen, Yahoo’s annual meeting on Aug. 1 should be a doozy.

CNET’s excellent Charles Cooper ran a story outlining the possibility of a big-bowl-of-sugar-sweeter deal between Microsoft and Yahoo today, but it did not outline specifics, such as a larger stake or investors being key to its momentum.

But it is indeed pressure from disgruntled investors that has fueled action of late.

Because of that, sources said, some Yahoo board members–including board chairman Roy Bostock–have concluded the company must do some sort of deal with Microsoft, especially if it keeps Yahoo independent.

But independent does not mean that Yahoo CEO and Co-Founder Jerry Yang or President Sue Decker would necessarily be at the helm.

That might be why the pending announcement of a reorganization, which BoomTown outlined last week in detail, might have been delayed.

Not so! In fact, sources said, the reorg will be announced tomorrow morning.

Investors liken the reorg, being planned by Decker, to shifting around deck chairs on the Titanic.

“It’s over for Jerry–he is out of it,” said one major investor, who–like many–has lost patience with the pair. “And Sue is just too tied to him to remain.”

That might be wishful thinking, but sources close to the Yahoo board said the idea of doing a better Microsoft search-ad deal and also bringing in new leaders is gaining traction as options dwindle.

At least two board members, sources said, who feel they have not been heard, are contemplating leaving the board, and disappointment with Yang’s management appears to be the major reason for it.

And Bostock and others who have been key to the Microsoft talks and have been closely aligned with Yang now realize they must change course and perhaps leadership, sources said, especially as a significant number of top executives have left recently.

Despite all this hubbub underneath the surface, Yahoo has been publicly and loudly backing the search-ad outsourcing deal with Google that it struck.

In a letter to shareholders released today from Yang and Bostock, they noted about the Google deal: “This carefully structured agreement strikes the right strategic balance..”

And, of course, they also whacked the proposed Microsoft deal Yahoo rejected, adding:

“While Microsoft’s search-only hybrid proposal may have been helpful to Microsoft, our board and management concluded it would have had a significant adverse impact on Yahoo strategically, leaving the Company without the operational control of search assets and technology we view as critical to our objective of becoming a leader in the converging search and display advertising business.”

But the Google deal would be undone in the new scenario.

That might not be such a bad thing, though. The Yahoo-Google partnership is already raising troublesome questions from politicians and regulators, which is worrisome.

If Yahoo dumped the deal, the company would have to pay Google $250 million.

In addition to that cost, under the beefed-up search deal, Microsoft probably would also improve on all aspects of its offer, with more revenue guarantees on search ads and a higher price for search assets it would buy outright.

If Microsoft bought that large a stake, though, Yahoo’s worries about an exclusivity agreement Microsoft has wanted would be less problematic.

And, to add further complexity, I would also not be surprised to see an old Microsoft ally, like News Corp. (NWS), also brought into the picture, if talks proceeded.

Could it lead to more than just a search-ad deal to buy the company whole? I doubt it, as one Microsoft exec after another has insisted to me that the real prize for the company is Yahoo’s search share and search-ad business.

“A larger deal is unlikely in the extreme,” said one exec about a whole takeover. “That chapter is done.”

(Unfortunately, we’re not quite done with block-that-metaphors on the issue, like this moooooving one one from TechCrunch: “But for now, a clear message is being sent to Microsoft: If they want Yahoo’s search milk, they’re going to have to buy the cow.”)

In any case, there have been no formal negotiations yet, but as I also noted in many posts this week, there should be.

I wrote:

“It’s perplexing to me, for example, why Yahoo’s highly ineffectual board is not breaking land and speed records to try to revive a buyout from Microsoft or why Microsoft isn’t itching to do a deal now that the price is so low that Yahoo is practically giving itself away. At the very least, Microsoft should have and should still try to win the partial search deal, as it needs that market share badly to compete with Google.”

In other words, Microsoft and Yahoo: Get thee to a nunnery, oops, real negotiating table. And fast.


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The problem with the Billionaire Savior phase of the newspaper collapse has always been that billionaires don’t tend to like the kind of authority-questioning journalism that upsets the status quo.

— Ryan Chittum, writing in the Columbia Journalism Review about the promise of Pierre Omidyar’s new media venture with Glenn Greenwald