Microsoft Move Opens Possibilities, Dialogue With Yahoo
posted in Outsourcing News and Top Outsourcing deals |Source: http://money.cnn.com/news/newsfeeds/articles/djf500/200805191449DOWJONESDJONLINE000502_FORTUNE5.htm
Microsoft Corp.’s (MSFT) weekend statement that it’s in renewed talks with Yahoo Inc. (YHOO) means a broad range of possible outcomes - ranging from a deal to outsource internet advertising to a full takeover - are now back on the table.
While the statement was crafted to suggest collaboration is a more likely short-term outcome than acquisition, most observers see it as a public relations exercise to soothe frayed relations with Yahoo’s management to prevent them from rushing into a defensive agreement with Internet search market leader Google Inc. (GOOG), the worst outcome from the Redmond, Wash.-based software giant’s perspective.
“We think the real intent of the resumed talks is to mend relationships between the two companies and to gauge Yahoo’s willingness to renegotiate a merger, which we view as the most likely outcome,” Standard & Poor’s equity research analyst Jim Yin said.
Yahoo’s shares rose Monday on Microsoft’s statement and recently traded up 15 cents, or 0.5%, at $27.81, with Microsoft’s shares trading down by 32 cents, or 1%, at $29.67. Yahoo’s shares have remained in the high 20s since Microsoft pulled out of talks, suggesting to many that Wall Street believed a Microsoft purchase of Yahoo was still a possibility.
Microsoft withdrew its offer for Yahoo of about $47 billion, or $33 a share, three weeks ago amid intransigence from Yahoo. Since then Carl Icahn, a billionaire activist investor who now owns more than 50 million Yahoo shares, has announced plans to unseat the Yahoo board and has nominated an alternative slate of directors. In a letter to Yahoo chairman Roy Bostock, he said Yahoo had behaved “irrationally” in snubbing Microsoft and wants to restart talks.
Sandeep Aggarwal, an Internet equity analyst with Collins Stewart, shares the conviction that Microsoft is likely paving the way for a transaction that goes beyond search outsourcing.
“Our view is that with Microsoft’s recent announcement, it is just a matter of timing, but some kind of Microsoft/Yahoo combination is imminent,” he wrote.
Microsoft’s statement, issued Sunday, says that it has raised with Yahoo “an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo.”
If read at face value, analysts say, this suggests Microsoft and Yahoo are exploring a search outsourcing arrangement. Needham modeled several scenarios in which Yahoo outsources its paid search, ranging from 25% to 100% of paid search business. In each case, analyst Mark May notes, this would generate a revenue uplift of about 20%, but he adds the incremental cost savings that would come from outsourcing a larger portion of search would generate more profitability.
However, May notes, “outsourcing search would be the wrong long-term strategic move for Yahoo, and we believe several large shareholders are against such a move.”
Others think a break-up of Yahoo, with Microsoft taking a significant portion of assets but either not acquiring or acquiring and then disposing of less core properties, is an increasingly likely scenario.
According to Stifel Nicolaus analyst George Askew, one option would be for Yahoo to sell its search business to Microsoft.
“Our current guesstimate is that Yahoo’s search advertising business generates around $1.6 billion in annual revenues excluding traffic acquisition costs and perhaps adjusted earnings before interest, tax, depreciation and amortization of $650 million. We believe the search business may be worth $11 billion or more in a sale to Microsoft.”
