Light shines on searchers

Deal would alter online landscape

Microsoft's $44.6 billion takeover play for Yahoo would create a more formidable search advertising competitor to Google and affect the future of other industry players, including Time Warner's AOL.

The unsolicited acquisition bid, unveiled Friday, would be Microsoft's biggest acquisition ever, handily exceeding last year's $6 billion deal for online ad technology firm aQuantive.

It values Yahoo at $31 per share and represents a 62% premium. But Yahoo shares rose 48% on Friday to $28.38, with some on Wall Street saying that the shares could move even higher amid optimism about a potential sweetening of the bid.

Most analysts expect Yahoo, which after disappointing fourth-quarter earnings last week was trading at four-year lows, to be ready to approve a deal, but its board might ask for a price increase. Observers say that the battered Yahoo has little leverage.

"The $44.6 billion price is 'full rather than silly,' " said David Mitchell, senior vp IT research at research firm Ovum. "Microsoft needs to ensure it does not overpay in the lust for the deal."

Yahoo said its board will "evaluate this proposal carefully and promptly in the context of Yahoo's strategic plans and pursue the best course of action to maximize long-term value for shareholders."

Google seems to be gearing up for a strong stance in Washington against the deal.

In a blog statement Sunday, Google chief legal officer David Drummond said, "The openness of the Internet is what made Google — and Yahoo — possible. … So, Microsoft's hostile bid for Yahoo raises troubling questions."

He said preserving an open Web should be key for regulators, adding that "Microsoft has frequently sought to establish proprietary monopolies — and then leverage its dominance into new, adjacent markets."

Few expect the software giant to face a rival bid from media and entertainment biggies, though News Corp. last year considered combining Yahoo with its Fox Interactive Media assets.

"I imagine in the boardrooms of News Corp., Comcast (and) GE (that) they're discussing whether they care to get involved," RBC Capital Markets analyst Jordan Rohan said. "My guess is the discussion is very brief. … The chance for another bidder is very low."

However, Microsoft's play for Yahoo will have wide-ranging implications for the future of sector players.

One consequence of the deal could be to slow down the rampant pace of acquisitions in the online space, which has led some to speak of a new valuation bubble.

Some suggest that Google could now move to acquire AOL, in which it has a 5% stake and with which it has a search relationship. "It would be premature for us to comment at this time," a Google spokesman said. Observers said AOL might do little to further boost Google's competitiveness in the key search ad space.

Many analysts suggested that a Yahoo sale could pressure Time Warner to make a faster decision on AOL's future, as logical buyers Yahoo and Microsoft likely would not look at an AOL deal anymore.

New TW CEO Jeffrey Bewkes has signaled that he will evaluate potential deals to create shareholder value. One of the most-discussed possibilities is a merger, sale or spinoff of AOL. A TW spokesman and an AOL spokeswoman declined comment.

"On the positive side for AOL, we believe this (Yahoo) offer underscores the strategic value of Internet assets with scale and audience size," Bear Stearns analyst Spencer Wang said.

The effect on the broader Web deal space and companies looking to sell for high price tags could be significant if the Microsoft-Yahoo deal does happen because it eliminates one big bidder. "This may constrain valuation multiples just a bit in the online space," Rohan said. "This could lead to a decreased M&A environment for larger Internet companies."

Experts touted how a Yahoo deal could lead to increased competition for Google.

"Microsoft is interested in search because it provides a beachhead into businesses — especially small- and medium-sized ones who don't have a direct relationship with Microsoft," Forrester Research analyst Charlene Li said.

Marcos Sahm in New York contributed to this report.
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