Yahoo No Longer Trying to Keep Merger Bid Secret

Story first appeared in the Wall Street Journal.

Yahoo Inc. has ended an effort to keep documents related to a 2008 merger bid from Microsoft Corp. sealed, more than a week after activist shareholder sought to have the material exposed to public view.

Yahoo has opted to withdraw its application to continue restrictions on public access to the documents, which it had filed with a Delaware court earlier this month, according to court records. The documents had been filed as part of a roughly four-year-old shareholder lawsuit -- since settled -- against the Sunnyvale, Calif., company.

The activist's hedge fund Third Point LLC has recently mounted a proxy challenge to Yahoo, in which it has obtained a stake of more than 5%. Third Point is seeking to have four of its nominees elected to the embattled Internet firm's board of directors.

Yahoo countered over the weekend with three of its own board appointees.

As part of its proxy challenge, Third Point filed a motion in a Delaware court on March 15 opposing Yahoo's efforts to keep under seal the shareholder litigation documents related to its decision to rebuff a $31-a-share takeover bid from Microsoft.

Third Point has said in public filings that the Yahoo board's rejection of Microsoft's bid was among its "misjudgments and failures."

Yahoo's shares closed Monday at $15.54. The company is seeking a turnaround under their Chief Executive, who was hired in January.

It wasn't immediately clear when the Microsoft-related documents stemming from the shareholder litigation would become publicly available.

Yahoo and Microsoft have formed a partnership in the years following their scuttled merger talks that has Microsoft powering Yahoo's Internet search results in a revenue-sharing arrangement.

Finally Microsoft and Yahoo Search Join Forces

Story by CNN Money

After a year and a half of dealing, the tech giants reach a deal to take on Google, which holds a 65% market share in online search.

NEW YORK (CNNMoney.com) -- Microsoft and Yahoo reached a long-awaited partnership Wednesday in a bid to challenge Google's dominance in online search.

Under the 10-year deal, searches on Yahoo.com will be powered by Microsoft's new Bing search engine. Yahoo, in turn, will be responsible for attracting premium advertisers.

Microsoft will pay Yahoo 88% of the revenue it gains from searches on Yahoo's sites. Microsoft will also have the rights to integrate Yahoo search technology into its own existing Web search platforms.

Yahoo said the revenue sharing agreement will increase its operating income by about $500 million annually.

According to Microsoft Chief Executive Steve Ballmer, the deal will allow Microsoft to "create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company."

And in a dig against search market leader Google (GOOG, Fortune 500), the companies said in a joint statement that "advertisers no longer have to rely on one company that dominates more than 70% of all search."

An 18-month odyssey. It was a partnership that was a long time in the making. Microsoft's (MSFT, Fortune 500) search market share has been slipping for more than two years, and the company has struggled to make its online advertising unit profitable. Meanwhile, Yahoo (YHOO, Fortune 500), once the search market leader, dropped to a distant second place behind leader Google (GOOG, Fortune 500) by 2007.

The dealings between the two companies began Feb. 1, 2008, when Microsoft made an unsolicited $44.6 billion cash and stock bid for Yahoo. A week later, Yahoo rejected the bid, saying the $31 per share offer "massively undervalues" the company, despite the fact that the bid represented a 62% premium over Yahoo's $19.18 closing stock price a day before the announcement.

In an attempt to fend off Microsoft, Yahoo launched a two-week trial partnership with rival Google on April 10, 2008. That involved outsourcing advertising space to Google as part of a short-term agreement that could eventually lead to a bigger partnership.

Microsoft threatened to take its bid to Yahoo's shareholders by the end of April if a deal could not be reached, and even sweetened the pot to $33 per share. In a turnaround move, Microsoft opted to avoid a hostile takeover and simply dropped the bid for Yahoo altogether on May 5 of last year. Microsoft CEO Ballmer cited the economics of the deal as well as Yahoo's interest in a long-term Google partnership as reasons.

Almost as soon as the deal seemingly died, signs of life re-emerged. First, activist investor Carl Icahn threatened Yahoo's board with a proxy battle if the company's executives didn't return to the bargaining table with Microsoft. Then, shares of Yahoo rocketed higher on May 19, 2008, when rumors circulated that Microsoft was interested in Yahoo's search advertisement business.

On June 12 of last year, however, Yahoo announced that discussions with Microsoft had ended without a pact. The same day, Yahoo turned around and announced a deal with Google to put Google ads on Yahoo's search pages. That tie-up was later nixed after a Justice Department antitrust investigation prompted Google to end the partnership. Icahn and Yahoo reached a truce in late July of last year.

The situation at Yahoo took a turn for the worse after the credit crisis erupted in October. Yahoo announced it would lay off 10% of its workforce in late October, shares slipped below $9 in November and Chief Executive Jerry Yang announced his resignation.

When Carol Bartz came on as Yahoo's new CEO in January 2009, she said she would not sell the company outright, but appeared to be more open to a sale of the company's search business.

Rumors of a possible deal were reignited when Bartz acknowledged at the All Things Digital conference on May 27 that Yahoo and Microsoft had been talking "a little bit," and said outright that Yahoo's search business was for sale, albeit for "boatloads" of money.

The next day, Ballmer unveiled Microsoft's new Bing search engine. Reports began to circulate in mid-June that Bing was a success, growing Microsoft's beaten-down search market share and eating into Yahoo's, and Ballmer reiterated to Fortune's Patricia Sellers that Microsoft "remains open to a partnership with Yahoo."

Yahoo Paid Big in Takeover Duel

Fending off Microsoft cost a little more than a quarter of firm's second-period net

Yahoo recently updated the amount it has paid for advice in fighting off the takeover advances of Microsoft. The new, higher total? $36 million.

Forget that the number is a little more than a quarter of Yahoo's second-quarter net income of $131.3 million, and up from the $22 million it disclosed in a filing in late July. The cost might have been worth it, because Yahoo appears to have succeeded in what many suspected was the goal of Chief Executive Jerry Yang and Chairman Roy Bostock since the end of January: fending off the takeover advances of rival Microsoft.

Of course, Yahoo never openly admitted it didn't want a deal with Microsoft; in fact, it bent over backward to tell investors and Microsoft that a takeover at $33 a share was practically one of its most cherished hopes.

Still, the body language -- the delays, the PowerPoint presentations, the coy responses -- signaled something very different to Yahoo investors, who suspected the Web-search-and-advertising concern wasn't as eager to be bought as its words indicated.

Several, including Gordon Crawford of Capital Research & Management and Carl Icahn, made their displeasure clear to Yahoo management.

For Yahoo's advisers at Goldman Sachs Group and Lehman Brothers Holdings, Microsoft's departure is bittersweet. As their client was dragged through the mud, criticized and disbelieved by investors, the battle against Microsoft hardly fit the profile of the ideal hostile-takeover defense.

And a portion of $36 million in fees, while generous, is only a fraction of what those advisers would have received if Microsoft had achieved its $44 billion-plus goal.

In his research report Monday, Morgan Stanley analyst William Greene predicted that if crude oil falls to $115 a barrel, the airline industry could be profitable. Well, oil was at $115.22 at midday Wednesday in New York, after settling at $113.01 Tuesday.

Providing this pricing point proves durable, will the industry take advantage?

Perhaps overlooked in the market's optimism Monday -- airline stocks were among the biggest gainers, though they were mixed Tuesday -- was a significant warning from Mr. Greene, namely that "falling oil prices introduce the risk of destructive competition as plans for capacity rationalization and revenue discipline fall victim to the seductive cost and market share benefits associated with capacity growth. Such actions would inevitably erode operating margins in an oil-driven up-cycle."

That is analyst-speak for fears that airlines might be lulled by those falling oil prices to forget that the real source of the industry's dysfunction is intense competition from too many domestic players.

Consider the issue of capacity. The agreement to combine Delta Air Lines and Northwest Airlines was motivated in part by the desire to achieve economies of scale. And indeed, analysts have pushed mergers as the best way to ensure steep cuts in the number of flights industrywide.

US Airways President Scott Kirby has said the industry is expected to cut capacity 9% by 2009. But will that be enough? Calyon analyst Ray Neidl, for instance, has put the needed figure at 20%.

The falling price of oil is good news. But for an industry that has been grounded by losses, it isn't a cure.

By: Heidi Moore
Wall Street Journal; August 14, 2008

Microsoft and Yahoo The Merger Drama Continues

Icahn, Ballmer pair up, talk Microhoo; Push to boot Yang and Yahoo’s board


Updated: Activist investor Carl Icahn and Microsoft are now in cahoots to toss Yahoo CEO Jerry Yang and the company’s board of directors.

Icahn says in a letter that he has been chatting up Microsoft CEO Steve Ballmer along with other key executives about how the two companies can “do a transaction together.” In the letter, Icahn claims that Ballmer “made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo.”

For its part Microsoft confirms Icahn’s account and says in a statement that “it would be premature to discuss at this time important details such as the price or other terms of a possible transaction.”

The message is clear: Boot Yahoo’s board at the company’s shareholder meeting on Aug. 1 and Icahn can pull off a deal with Yahoo. And Microsoft is interested.

The letter and Microsoft’s confirmation–timed to coincide with one another on the wires by the way–are notable because it puts all the cards on the table. Icahn and Microsoft are teaming up against Yahoo’s current management and aren’t being shy about it. To date, the biggest question about Icahn’s bid is whether Microsoft would actually step up to the plate if the billionaire managed to grab control of Yahoo’s board. Yahoo launched a few strikes last week to fend off Icahn’s upcoming assault. Meanwhile, Microsoft dropped hints that it was still interested in Yahoo.

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The opening paragraph of Icahn’s letter says it all:

During the past week I have spoken frequently with Steve Ballmer, CEO of Microsoft. Several of our conversations have lasted as long as an hour. Also, a few of our discussions have taken place while other top executives, such as Kevin Johnson, participated. Our talks centered on the industry in general but, more importantly, on how Yahoo! and Microsoft can do a transaction together. Steve made it abundantly clear that, due to his experiences with Yahoo! during the past several months, he cannot negotiate any transaction with the current board. His logic is simple. If and when a transaction was consummated, Microsoft would be guaranteeing a great deal of capital at closing. However, a transaction could take at least nine months and perhaps longer to obtain regulatory clearance in the U.S., Europe, and elsewhere. During that period, if the current board and management team of Yahoo! mismanage the company (and their recent track record is far from reassuring), Microsoft would be putting its money at risk and a great deal could be lost.

Microsoft bolsters Icahn’s letter with:

Despite working since January 31 of this year, as well as in the early part of last year, we have never been able to reach an agreement in a timely way on acceptable terms with the current management and Board of Directors at Yahoo!. We have concluded that we cannot reach an agreement with them. We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company.

The bottom line: If Icahn wins, Microsoft will “enter into discussions immediately after Yahoo!’s shareholder meeting if a new board is elected.”

There’s some good old fashioned hard ball for you.

Now the big question is whether Yahoo’s shareholders will toss the entire board, some of it or just enough to put Icahn in control.

Icahn indirectly panned Yahoo’s latest restructuring effort adding in his letter that:

Our company is now moving toward a precipice. It is currently losing market share in its “Search” function; our current Board has failed to bring in a talented and experienced CEO to replace Jerry Yang (right) and return Jerry to his role as Chief Yahoo!, and currently it is witnessing a meaningful exodus of talent. It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo!. According to publicly available information, Google’s income from operations grew 59% per year over the last two years while Yahoo!’s shrank 21% per year. However, none of the above has caused the Yahoo! board to hesitate in paying themselves $10,000 per week. IT IS TIME FOR A CHANGE.

Icahn says that voting with his slate of directors will ensure that Yang and Yahoo’s board “will not be able to ‘botch up’ a negotiation with Microsoft again, simply because they will not have the opportunity.”

Yahoo responded to the Icahn letter in a statement noting that the Icahn-Ballmer plan is off the mark.

Yahoo!’s Board of Directors continues to stand ready to enter into negotiations with Microsoft Corporation for an acquisition of Yahoo!. Indeed, as recently as June, Yahoo!’s independent directors and management approached Steve Ballmer about just such a transaction, only to be told that Microsoft was no longer interested even in the price range which they had previously proposed. Now Mr. Ballmer and Mr. Icahn have teamed up in an apparent effort to force Yahoo! into selling to Microsoft its Search business at a price to be determined in a future “negotiation” between Mr. Icahn’s directors and Microsoft’s management. We feel very strongly that this would not lead to an outcome that would be in the best interests of Yahoo!’s stockholders. If Microsoft and Mr. Ballmer really want to purchase Yahoo!, we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo! beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it.

For shareholders, this latest turn of events has really clarified the Yahoo decision. If you want Yahoo–or a part of it–to be acquired by Microsoft vote Icahn. There are no mysteries anymore. If you want Yahoo to stay independent in some fashion stick with your current management.

Full text of the Icahn letter:

Carl C. Icahn
ICAHN CAPITAL LP
767 Fifth Avenue, 47th Floor
New York, NY 10153

July 7, 2008

Dear Yahoo! Shareholders:

During the past week I have spoken frequently with Steve Ballmer, CEO of Microsoft. Several of our conversations have lasted as long as an hour. Also, a few of our discussions have taken place while other top executives, such as Kevin Johnson, participated. Our talks centered on the industry in general but, more importantly, on how Yahoo! and Microsoft can do a transaction together. Steve made it abundantly clear that, due to his experiences with Yahoo! during the past several months, he cannot negotiate any transaction with the current board. His logic is simple. If and when a transaction was consummated, Microsoft would be guaranteeing a great deal of capital at closing. However, a transaction could take at least nine months and perhaps longer to obtain regulatory clearance in the U.S., Europe, and elsewhere. During that period, if the current board and management team of Yahoo! mismanage the company (and their recent track record is far from reassuring), Microsoft would be putting its money at risk and a great deal could be lost.

For example, in a transaction to purchase the whole company, a very large amount of capital would be due at closing. Even in an “alternate” transaction, where just the “Search” assets were purchased, large guarantees would have to be made and, again, large sums could be lost if the company was mismanaged. Microsoft perceives this risk may be quite high with the current board and management in place. However, Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company. He stated that Microsoft would be willing to enter into discussion immediately if the new board that has been nominated were elected. While there can be no assurance of a future transaction, as many of you know, I have negotiated successfully a large number of transactions over the past years. If and when elected, I strongly believe that in very short order the new board would, subject to its fiduciary duties, be presenting to shareholders either a purchase offer for the whole company or a very attractive offer to purchase “Search” with large guarantees. I hope to continue to be speaking to Steve over the next few weeks; however, since I do not as yet represent the Yahoo! board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.

Much has been said about how badly the Yahoo! board has “botched up” negotiations with Microsoft over the past months. There is no need to keep pointing out the mistakes I believe Yahoo! made by not immediately taking a $33 offer made by Microsoft. But one thing is clear — Jerry Yang and the current board of Yahoo! will not be able to “botch up” a negotiation with Microsoft again, simply because they will not have the opportunity.

Our company is now moving toward a precipice. It is currently losing market share in its “Search” function; our current Board has failed to bring in a talented and experienced CEO to replace Jerry Yang and return Jerry to his role as Chief Yahoo!, and currently it is witnessing a meaningful exodus of talent. It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo!. According to publicly available information, Google’s income from operations grew 59% per year over the last two years while Yahoo!’s shrank 21% per year. However, none of the above has caused the Yahoo! board to hesitate in paying themselves $10,000 per week. IT IS TIME FOR A CHANGE.

If elected, I have little doubt that the new board, subject to its fiduciary duties, will do what the current board will not do, i.e.,

– Immediately start negotiation with Microsoft to sell the whole company or, in the alternative, sell “Search” with large guarantees.

– Move expeditiously to replace Jerry Yang with a new CEO with operating
experience.

Sincerely yours,

CARL C. ICAHN

Advertising Provides Key To Microsoft-Yahoo Deal

So Microsoft is back, this time in talks over an unspecified "transaction" with Yahoo.

A couple of weeks ago, I said Yahoo may have blundered its way into a better outcome for its shareholders, and this latest twist strengthens my conviction. With a possible deal with Google still being considered and Microsoft back at the table, much-derided Yahoo is suddenly looking like Cinderella at the ball. Yahoo's management may yet emerge as heroes.

Microsoft maintains that it isn't discussing another takeover bid, though it reserves the right to do so. What might they be talking about?

Speculation has focused on combining Yahoo's and Microsoft's search businesses, which are a distant No. 2 and No. 3, respectively, to Google's. April figures from Nielsen Online, a research firm that tracks Internet usage, put Google's share of the U.S. search market at 62% versus 27% for a combined Yahoo-Microsoft. Surely the trend of ever-shrinking market share hasn't been lost on executives at Yahoo and Microsoft. So combining their search operations makes about as much sense as the Sears-Kmart merger.

The only advantage would be cost savings. Yahoo spends about $1.2 billion a year on "product development," much of that presumably on the search arms race with Google. It's hard to say how much Microsoft spends, but let's assume a comparable figure. Combining the two operations would presumably cut close to $1 billion in costs. I assume Microsoft would buy Yahoo's search operations, with some sort of revenue-sharing arrangement.

But why stop at search? A combined Yahoo-Microsoft still has the edge over Google in display advertising. Kevin Johnson, president of Microsoft's platform and services division, said in a widely circulated memo to employees this past weekend that his aim was to "disrupt" the market in search and "win" in display advertising. He noted that Microsoft's ad revenues had increased 40% compared with declines at Yahoo and Google. This intense competition doesn't yet reflect Google's deployment of recently acquired DoubleClick but suggests an intense campaign ahead.

Display is where Yahoo's sheer numbers are most compelling. What Yahoo has going for it is content and a vast number of unique visitors. Scale is what matters, just as it does for Super Bowl advertising. Scale is Yahoo's most valuable asset.

In the most recent quarter, about 87% of Yahoo's revenue came from advertising. If Microsoft essentially buys all of Yahoo's ad business, both search and display, then it gets nearly all the benefits of a merger. Yahoo would become a pure content company, basically outsourcing its ad business to Microsoft.

There's a deal that starts to make sense. This surely wouldn't be lost on Google, which has concluded a successful search advertising test run with Yahoo, and which would benefit from a display deal as well. In my previous column I called for Yahoo to turn over all its search advertising to Google, but that seems too limited now that Microsoft has upped the ante. Google should also be looking to acquire Yahoo's entire ad business in a cash-and-revenue-sharing deal.

The big question is price, but given the huge potential advantages to both Google and Microsoft, it should be a big number. As a Yahoo shareholder (I also own Google), I say let the bidding war begin.
By: James B. Stewart
Wall Street Journal; May 21, 2008

Icahn, Microsoft merger maven?

Billionaire investor Carl iCahn has a bone to pick with Yahoo's board of directors for not accepting Microsoft's buyout offer.

The notorious shareholder activist Carl Icahn formally announced that he is launching a proxy fight. He has formed a 10-member slate in an effort to unseat Yahoo's current board at the company's annual shareholder meeting on July 3.

Icahn, who stated that he has acquired roughly 59 million shares of Yahoo, has also sought antitrust clearance from the Federal Trade Commission to acquire up to another $2.5 billion in Yahoo shares.

Icahn is leaning on such high-profile tech names as Mark Cuban in his efforts to unseat Yahoo's current board at its annual shareholder meeting and to pave the way for a Microsoft-Yahoo merger. Cuban, owner of the Dallas Mavericks and chairman of HDNet, ironically sold Broadcast.com to Yahoo for $5.04 billion in 1999.

Icahn has been making his mark in the tech industry of late, most notably in the last year or so, with his actions regarding Motorola and BEA Systems. Over the past 13 years, he's logged more wins than losses in his proxy fights, according to FactSet SharkWatch.

Microsoft earlier this month walked away from its multibillion-dollar bid to buy Yahoo when the two companies failed to come to agreement over the purchase price.

Some CNET News.com readers were suspicious of Icahn's motives.

"Icahn specializes in what's best for him," one reader wrote in the TalkBack forum. "Is he in this for the long haul? Or just the short-term profit?"

On the other side of the merger manners meter, Hewlett-Packard proved that friendly blockbuster deals could still be done today.

HP plans to acquire computer services firm EDS for $13.9 billion in a deal intended to boost HP's services revenue. HP expects that the addition of EDS will more than double HP's services revenue of $16.6 billion in fiscal 2007.

But the sheer size of the deal is more than a bit daunting. The deal represents the combination of the largest number of people that the IT services sector has seen, Gartner analyst Ben Pring said, and HP faces serious challenges when it comes to integrating two vastly different companies. The track record of deals like this is "pretty spotty," Pring said, and IBM's purchase of PricewaterhouseCoopers demonstrated that the transition can be tough.

In other merger news, CBS has agreed to acquire CNET Networks, the publisher of News.com, in a deal valued at $1.8 billion. The acquisition will make CBS one of the 10 most popular Internet companies in the United States, with a combined 54 million unique users per month and about 200 million users worldwide, the companies said.

Google wants to make friends
Google has unveiled a preview of Friend Connect, a way to add social features to a Web site without programming. Meanwhile, Facebook has announced its own Facebook Connect, in which members will be able to use their Facebook identities across the Web--profile photos, names, photos, friends, groups, events, and other information. Facebook profile content, for example, could appear on other social sites, and Facebook event listings could theoretically connect with external event and invitation services.

It's a big move for Facebook. Until this point, the social network has had a reputation for keeping its cards close to its chest--even banning the account of popular blogger Robert Scoble when he used a script to export his Facebook contact list to Plaxo. But Facebook has a representative in the Data Portability Workgroup, and executives have said Facebook has wanted to bring its information outside the site eventually.

Google Friend Connect, on the other hand, employs several more-or-less standard networking technologies--OpenSocial as a foundation for richer Web applications; OpenID to handle login chores; and OAuth to let users approve the grafting of new branches onto their existing social networks.

It's yet another option in the complicated and fast-changing set of alliances and standards efforts in the social-networking domain. When Friend Connect was first announced, Google engineers explained that it would take advantage of other social-networking sites' APIs to enrich the program--including Facebook's.

However, a post on Facebook's developer blog explains that the social network has suspended Google Friend Connect's access to its API, citing a violation of its internal terms of service. Facebook contends that while its users would manually opt in to Friend Connect, they would not have control over the third-party sites that would then use Friend Connect through Google's API.

Meanwhile, Comcast is adding a social dimension to its services through the acquisition of Plaxo. Terms of the deal were not disclosed, but the purchase price is thought to be in the $150 million to $170 million range. The acquisition is a big win for Plaxo, whose Pulse social-networking service, with 1.5 million active monthly users, has been overshadowed by the likes of Facebook and MySpace.

Web surf's up on street, stars
Google is gathering 3D data along with the photographs it takes for its online Street View service, a potential boon for those of us who fantasize about flying like Superman through urban landscapes--at least virtually.

"The imaging technology includes lasers that collect 3D geometry data," the company said in a statement. However, for now, at least, the 3D information is just experimental, Google said.

Savvy observers, looking at Flickr pictures of Google Street View cars gathering images in Milan, had identified the 3D laser scanners in April. At the time, Google didn't comment, but it now has confirmed the scanners, as well as the expansion of Google Street View to Europe.

Google Maps now can also show real-estate listings, presenting pushpins that show houses for sale. To show real-estate results, click "Show search options," then select "Real Estate" from the drop-down list. The Web site then shows a list of properties for sale on the left tied to pushpins on the map on the right.

Search results can be refined by specifying price range or number of bedrooms and bathrooms. In addition, there's a text mode that will be more familiar to the classified-ad crowd. (Huh? Text mode for a mapping site? There's still a small map visible.)

But soon you will be seeing less from Google's Street View; the company has begun testing face-blurring technology, responding to privacy concerns from the search giant's all-seeing digital-camera eye. The technology uses a computer algorithm to scour Google's image database for faces, then blurs them, said John Hanke, director of Google Earth and Google Maps.

He likened the issues some have with Street View to the ones that took place when Google introduced aerial views to Google Maps. It took time for the public, regulators, and Google to get comfortable with the feature, but "it needs that debate. We see that and try to let it play out."

Meanwhile, Microsoft launched its WorldWide Telescope, a free Web-based program that allows Web surfers to explore galaxies, star systems, and distant planets. The program, which was developed by Microsoft's research arm, weds images from the Hubble Space Telescope, the Chandra X-Ray Observatory Center, the Sloan Digital Sky Survey, and others.

Microsoft said WorldWide Telescope will be made available for free as a tribute to Jim Gray, a Microsoft researcher who disappeared off the California coast while sailing last year.


By Steven Musil
CNET News.com; May 16, 2008

The War for the Web

Microsoft was smart to walk away (for now) from its $44 billion bid for Yahoo. It's never good to overpay. But the software giant – whose stock has flatlined for eight years – was onto the right strategy in looking to the Web for growth.

Can't Microsoft build something on its own? Why the rush to pay billions for Yahoo? The simple (and wrong) answer was that adding Yahoo's 20% Web search market share to Microsoft's 10% meant that it could compete against Google's 60% share. Technology changes too fast for that to make sense except on paper. Programs run anywhere these days – on your desktop computer, on servers in data centers, on your iPod, cellphone, GPS, video game console, digital camera and on and on. It's not just about beating Google at search, it's about tying all these devices together in a new end-to-end computing framework.

With the Microsoft/Yahoo deal breakdown, everyone assumes Google walks away with the prize. Not so fast. This contest is just starting. For Microsoft or Google or anyone else to win, they need four key elements of an end-to-end strategy:

- The Cloud. The desktop computer isn't going away. But as bandwidth speeds increase, more and more computing can be done in the network of computers sitting in data centers – aka the "cloud."

There, search results can be calculated, companies' payrolls processed, even the complex graphics for video games can be drawn. But it's not cheap. These clouds are multibillion-dollar investments. Google spent $842 million in the last three months on servers, data centers and fiber optics.

Today, there are several major clouds: Google, Yahoo, Microsoft, Amazon and smaller players IBM and Sun. Can there be more? Sure, but it would require a business model that could not only pay for it, but could rip it out every few years and modernize it. Google's $20 billion Web advertising business gives it the cash flow to do so. Advantage Google.

- The Edge. The cloud is nothing without devices, browsers and users to feed it. Book buyers are basically paying for Amazon's data centers. Yahoo is a favorite for finance and sports enthusiasts, who pay for its data centers. Google worked its way into the toolbars of Firefox, and even Microsoft's browser.

And Microsoft? It was stripped of its ability to control Windows desktop real estate during the late '90s Netscape feud. Accused of using its overwhelmingly popular Windows operating system to unfairly dominate other new markets, Microsoft settled the dispute with the Justice Department in 2001.

Now Microsoft scrambles for other advantages. One lies in smart mobile devices, which is the fastest-growing location to launch search requests. Microsoft software runs on about 20% of smart phones in the U.S.

Don't underestimate the value of Microsoft's other market stronghold, its X-Box video game platform. Now you know why Google is scrambling to plant a flag in the cellphone business with its Android technology and bids for wireless spectrum. So far, advantage Microsoft.

- Speed. Once you build the cloud, it's all about network operations. Whoever can deliver search results faster, wins. Users only realize this subconsciously, but it's true: Google's dominant share is as much about speed as it is for relevant results. Compare it to Microsoft or Yahoo and you'll see. Google built data centers next to waterfalls so electricity could be cheap enough to help it win the speed war.

New cloud applications appear every day – backing up files, managing your money, editing photos, running the back end of multiplayer games like World of Warcraft. Now corporate America is evaluating moving its accounting, scheduling, order management and the like into the cloud, and speed will be a top priority. Advantage Google.

- Platform. Yahoo's mistake was relying on expensive workers to update Web pages and sell ads, and especially to run Yahoo Finance, Sports, HotJobs and Travel. Google hates using people for these tasks. The company may love programmers and probably customers as well, but it tries to put absolutely no one in between them. Google's genius was to automate all its Web page creation and to have a market set prices for ads.

But even though Google has more than 10,000 employees, the company doesn't have a lock on brain power – especially since its stock is not climbing as fast as it once did, and with young coders setting their eyes on the next big startup.

Having a fast cloud is nothing if you keep it closed. The trick is to open it up as a platform for every new business idea to run on, charging appropriate fees as necessary.

Microsoft knows this. I sat through a keynote speech by Bill Gates maybe 15 years ago. Asked why Microsoft makes all the money in the software business, he snapped: We don't make all the money. Actually, we only make money because we are a platform for others to use our software to make money themselves.

Only by opening up system internals to thousands of hungry developers can anyone truly create an operating system in the cloud. Google has made open announcements but is still quite closed. Advantage Microsoft.

So with the failure of the Yahoo bid, where does that leave Microsoft? The answer is found in Microsoft's mantra: embrace, extend and innovate. Made famous in a 1994 Microsoft executive memo, this mantra has worked again and again: Windows dominated Apple for decades, the Excel spreadsheet bypassed Lotus 1-2-3, and the Internet Explorer browser destroyed Netscape.

Of course, Microsoft could come back and bid again for Yahoo at $25. But there is a go-it-alone strategy: Embrace the Web search and advertising business. Maybe even do what Craigslist did to newspaper want ads, devaluing search advertising by offering the same thing for free, or really cheap.

The trick is to then extend and innovate. Run code that figures out what users are looking for, not just on servers, but on X-Boxes, Zune music devices and even Apple iPhones. Some of the new markets aren't even twinkles in developers' eyes.

At the moment, neither Google nor Microsoft, or anyone else, has nailed down cloud, edge, speed and platform. All the loosely coupled electronic devices in our pockets need to work together seamlessly with Facebook applications in the cloud. Who will do it? Unclear.

The continuing battle between Microsoft and Google will mean fierce competition – adding features, building data centers, cutting deals and spending money on speed and customer convenience. That's the way to move technology forward. It's great to see Microsoft with some fight left in it. Not only hasn't the Internet yet matured, it's becoming an ever-more high stakes game.

By: Andy Kessler
Wall Street Journal; May 6, 2008

Microsoft Ends Pursuit of Yahoo, Reassesses Its Online Options

Software Maker Cites Divide Over Price; The Google Factor

Yahoo Inc. Chief Executive Jerry Yang didn't really want Microsoft Corp. to buy his company. By Saturday, Microsoft Chief CEO Steve Ballmer didn't want that either, leaving both technology companies facing fundamental questions about their futures.

The failed courtship leaves Microsoft with limited options for achieving its strategic goal of expanding its presence online and may not close the door to another bid for Yahoo down the road.

In a letter to Mr. Yang Saturday in which he withdrew Microsoft's takeover offer, Mr. Ballmer cited a divide over price, saying Microsoft had been willing to raise its offer for Yahoo to $33 a share, or about $47.5 billion, and Yahoo demanded at least $4 a share more.

But some people close to the matter believe that the two sides could have found a middle ground if negotiations continued, particularly since some of Yahoo's major shareholders had signaled late last week they would support a takeover by Microsoft at a price in the range of $34 or $35 a share.

Microsoft's battle for Yahoo represented part of the scramble by technology and media giants to capture the flood of advertising dollars moving online and to block Web giant Google Inc. from extending its dominance in online-search advertising.

Mr. Ballmer had said in recent days that he was confident Microsoft could go it alone to build a competitive online-advertising business without buying Yahoo. At the same time, he had faced skepticism from within Microsoft about its ability to pull off such a large acquisition at a time when the software maker faces many other challenges. Mr. Ballmer himself had shown hints of such doubts in recent weeks, say people familiar with the matter.

He also squared off against a Yahoo that was increasingly confident that it was worth much more than Microsoft had been offering. While Mr. Yang and Yahoo directors preferred from the start that the Internet company stay independent, they were particularly emboldened by the success of a test late last month to carry search advertising from Google. "There was just nothing that showed any sign of this potentially coming on track," said one person familiar with Microsoft's thinking, who questioned Yahoo's stated willingness to sell the company to Microsoft at the right price, as it had said publicly.

Having averted a sale to Microsoft, Mr. Yang probably will have to placate shareholders who had been hoping for a deal. Analysts estimate Yahoo shares will fall to between $20 and $25 a share without Microsoft's bid to prop them up, down from their 4 p.m. close of $28.67 Friday in Nasdaq StockMarket trading.

Yahoo is hoping to seal a broader search-ad pact with Google in the coming days, but antitrust experts warn that will surely encounter intense regulatory scrutiny. And the company, which has struggled to focus and execute its plans in recent years, faces deep skepticism from investors about the financial targets it has released for 2009 and 2010 to justify its value on its own.

Microsoft's withdrawal diminishes prospects that Google will face a dramatically bulked up competitor in Web search and online advertising anytime soon. Google's runaway success at the expense of Yahoo and Microsoft in recent years was one major driver of Mr. Ballmer's effort to close a deal. Now, Google is likely to handle at least some of Yahoo's search-advertising business, and Microsoft is heading back to the drawing board to consider its own options. "It's disappointing because one would hope there would be a more balanced marketplace," said Sir Martin Sorrell, chief executive of advertising company WPP Group PLC. "Google's dominance continues."

Microsoft could still eventually end up buying Yahoo. If Yahoo's share price plummets, shareholders could intensify efforts to pressure Yahoo's board to agree to a deal at a lower price. Already several shareholders have sued the company over its rejection of the Microsoft bid.

Mr. Ballmer's letter Saturday appeared intentionally crafted to spell out to Yahoo shareholders how hard Microsoft worked - and the amount it boosted its bid-to entice Yahoo's board to enter a deal. That is a typical tactic for a would-be acquirer hoping to spur shareholder activism and one followed by Oracle Corp. last year in its bid for BEA Systems Inc. After BEA rejected Oracle's offer, Oracle withdrew its bid and its executives took great pains to spell out the effort they made to persuade BEA to enter a deal. Shareholder pressure early this year forced BEA into Oracle's arms.

The takeover standoff that began with Microsoft's unsolicited $31-a-share offer for Yahoo on Jan. 31 finally came to a head Saturday morning in a meeting between Mr. Ballmer, Microsoft Platforms and Services Division President Kevin Johnson, Mr. Yang and Yahoo co-founder David Filo at the airport in Seattle, say people familiar with the matter.

Messrs. Yang and Filo said that Yahoo directors were open to a deal at $37 11 share, and that the two founders would accept that sum as well, despite their personal desire for $38 a share, these people say. "They were saying, this is as low as we can go. There was no indication they were coming off that number," a person close to Microsoft said.

In Seattle, the two sides discussed price and strategy for several hours and Messrs. Yang and Filo returned to California expecting Microsoft might counter with another offer, according to one of the people familiar with the matter.

In a subsequent telephone conversation with Mr. Ballmer, the Microsoft CEO told Mr. Yang that Microsoft was ending its pursuit of Yahoo. Mr. Ballmer sent his letter to Mr. Yang around 4 p.m. Pacific time Saturday officially withdrawing Microsoft's offer. After hearing Messr.s. Yang and Filo's position on Saturday, Microsoft concluded that the Yahoo founders didn't really want to do a deal, according to people close to the. software maker.

People close to Yahoo dispute the assertion that the Internet company wasn't prepared to continue negotiating on price. Yahoo believed that its shareholders weren't prepared to accept a deal in the price range Microsoft was offering, people close the company say.

Though Microsoft never let go of the threat of a hostile deal, Mr. Ballmer ultimately determined that such a course would have been too destructive. Even if it ultimately won shareholder support for a hostile bid, Microsoft would likely have run into trouble with regulators, its advisers warned.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer," Mr. Ballmer said in a Microsoft news release. "We believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," he added.

Yahoo Chairman Roy Bostock responded in a press release, by saying, "From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view."

One person familiar with the matter said that the $37 a share Mr. Yang cited to Mr. Ballmer was based on the company's calculation of its value-particularly in light of alternatives such as a Google ad deal-and not what its large shareholders were demanding. Major Yahoo shareholders had signaled by late last week that they were open to a deal around $34 or $35 per share and were optimistic that the price gap with Microsoft could be bridged, according to people familiar with the matter.

Some people close to the situation believe Microsoft would likely have won a hostile takeover battle at $33 per share. But Mr. Ballmer in his Saturday letter to Mr. Yang cited that potential Google deal as a reason that Microsoft decided not to go hostile. "Your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path," he wrote.
Mr. Ballmer said this was because such a deal would undermine Yahoo's online advertising sales strategy and pose regulatory and legal problems Microsoft wouldn't want to inherit.

A person familiar with Microsoft's thinking said that enhanced employee severance benefits Yahoo instituted in February in case of a change of control represented a cost that Microsoft was also reluctant to bear. Other concerns within Microsoft may have also influenced Mr. Ballmer's thinking. The Yahoo bid was driven by a small group of executives from Microsoft's online group. That group had planned for the bid process to play out fairly quickly with Yahoo entering a friendly deal.

But as time dragged on, other Microsoft executives, including some in the group over seeing Office software, ex pressed their opposition to th deal, say people familiar wit the situation. Also, concern within the company grew over the challenge of integrating Yahoo's roughly 14,000 staff an various online services, the say. Whether these concerns affected Mr. Ballmer is hard to tell but people close to mm say he started to raise more question about the deal to his lieutenants.

Internal confusion over Mr. Ballmer's plans was rife in March at a three-day meeting of Microsoft's 150 top executives in upstate Washington. Despite exhaustive presentations on the future plans of each Microsoft business group, Yahoo was hardly mentioned. Only on the last day
did Mr. Ballmer mention the bid, in response to a question. He said few words on the topic, leading some executives to believe was distancing himself from the deal.

As a result, Microsoft executives were surprised when Mr. Ballmer on April 5 sent a letter to Yahoo directors threatening a hostile approach if they didn't reach a friendly deal by April 26. That spurred Yahoo executives and an entourage of ankers and advisers from both sides to meet with Microsoft on April 15 at a Portland, Ore., law firm for what one attendee described as an "information-sharing session about operational issues, strategy and other issues." presentation from Yahoo included a slide that said Microsoft's offer "significantly undervalues" Yahoo.

Late into the meeting Mr. Ballmer addressed the elephant in the room: "Where are we on price?" he asked Mr. Yang, according to two people who were present. Responding to Mr. Ballmer's question, Mr. Yang repeated that the original offer of $31 a share "substantially" undervalued the Internet company. Mr. Ballmer again asked for a firm price, and Mr. Yang said he didn't have a number.

After flying back to New York on the redeye from Portland, Microsoft's advisers call with their counterparts at Yahoo to address the price issue.

During the April 18 call, Goldman Sachs banker Gene Sykes, one of Yahoo's lead bankers, said that at $40 a share the Internet company would be open to a friendly deal. Yahoo's advisers added that below that threshold there would be likely be a lot of debate among Yahoo directors, stressing that the board wasn't specifically asking for $40 at that point, say people familiar with the matter.

Microsoft and its advisers believed that by asking Yahoo for a price they were sending a clear signal that they were willing to pay more than the original bid of $31 a share. But they viewed an asking price of $40 a share as an unrealistic starting point.

For more than a week afterward, there was silence between the two camps. On Saturday, the deadline Mr. Ballmer had set came and went without any movement.

On the following Tuesday, April 29, Mr. Yang called Mr. Ballmer and told him Yahoo might be open to a deal below $40. He described $40 as the "bankers' view," not the board's, according to two people close to Microsoft. Yahoo Chairman Roy Bostock also called Mr. Ballmer and, along with Mr. Yang, urged the Microsoft 'CEO to sit down with Yahoo to kick-start discussions.

On Wednesday, Mr. Ballmer arid Mr. Yang met at Yahoo's law firm in Palo Alto, Calif., the people familiar with the matter say. At the meeting Mr. Yang signaled that Yahoo could accept less than $40 a share.

People close to Yahoo said that Microsoft indicated at Wednesday's meeting it could raise its bid per share a "couple" or a "few" dollars. But Yahoo learned that Microsoft was willing to make a specific offer of $33 a share only in Mr. Ballmer's letter to Mr. Yang Saturday these people said. "We did not know what the offer was," said one person close to Yahoo.

People close to Microsoft say they had made it very clear to Yahoo by the end of last week that they were prepared to offer $33, and that at that price the software maker was "near the end of the rope." On Friday, Microsoft general counsel Brad Smith called Ron Olson, a lawyer for Yahoo's board, and told him Microsoft was prepared to pay $33, according to people familiar with the matter.

During their talks last week, Microsoft and Yahoo at least briefly discussed the possibility of Microsoft's buying just Yahoo's Web-search business alone, say people familiar with the matter, though they never reached an agreement on that either .. One person involved in the negotiations described the search-business talks as a "sideshow."

While Microsoft could eventually pursue Yahoo again, people close to the two sides said they didn't believe Saturday's withdrawal was a negotiating tactic designed to pressure Yahoo to accept a lower offer. Yahoo will now likely face pressure from its investors to justify why it couldn't reach a deal in the range of $33.

In addition to the Google negotiations, Yahoo has also been in discussions to merge with Time Warner Inc.'s AOL Internet unit, under an arrangement in which Time Warner would hold a roughly 20% stake in Yahoo, people familiar with the matter said. But Microsoft's withdrawal of its Yahoo bid could shake the AOL discussions off course. It is possible, for example, that Microsoft will become a suitor for AOL, say people familiar with the matter.

Microsoft's next course of action, say people familiar with the company, will likely be to try to form a tie-up with another Internet company that could pull more consumers and advertisers to its Internet services such as Web search.

In an interview on Thursday Mr. Ballmer noted that few Internet companies have the size that Microsoft would need to immediately get a boost to its business and market share in Internet advertising. Among them, he listed Facebook Inc., AOL and MySpace, the social-networking service owned by News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.

By: Kevin Delaney, Matthew Karnitschnig, & Robert Guth
Wall Street Journal; May 5, 2008

Microsoft confronts tough choice on Yahoo


Steve Ballmer is facing one of the biggest decisions of his career: Walk away from Microsoft's $42.7 billion acquisition offer for Yahoo or launch the largest hostile takeover battle in tech-industry history.

The choice comes after Yahoo declined to agree to a deal by the Saturday deadline set by the Microsoft's chief executive -- and after the two sides failed to make any progress in recent weeks in resolving the disagreement over price that has divided them over the last three months. (Microsoft publishes MSN Money).

Ballmer vowed in an April 5 letter "to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo board."

Still, Ballmer faces opposition to the deal in his own ranks: Executives at several Microsoft divisions oppose the bid on grounds it will divert needed resources and attention from other challenges the company faces, said people familiar with the company. That sentiment is heightened as Microsoft heads into its annual budgeting season, said people familiar with the company.

There was no direct contact between the two sides this past weekend and people close to both camps said they were preparing for the next stage of battle. Microsoft was unlikely to make a move on Monday, however, people familiar with the matter said.

Ending its pursuit of Yahoo seems less likely following Ballmer's promise to go directly to shareholders after the deadline. Abandoning the bid following his public saber rattling might damage his own credibility as well as Microsoft's. Though Microsoft hasn't ruled out abandoning its pursuit, it is unlikely to do so, people close to the company said.

Walking away could still draw Yahoo into Microsoft's arms if Yahoo's share price falls on the news. That could spark more investor pressure to strike a deal with Microsoft. Oracle followed a similar playbook last year to acquire BEA Systems.

If Microsoft pushes ahead with its proxy fight, its challenge will be in determining at what price it should pursue an exchange offer. The value of its bid has declined as its share price has fallen 8% since Jan. 31, when it offered Yahoo a combination of cash and stock then valued at $31 a share, or $44.6 billion. On Friday, Microsoft's stock took another hit after the company disappointed investors with its earnings outlook; as a result, the bid value stood at $29.68 a share as of 4 p.m. Friday. Yahoo's shares at that time were trading at $26.80 on the Nasdaq Composite Index

In his letter, Ballmer suggested Microsoft might offer less than the original bid if Yahoo didn't agree to a friendly deal. If Ballmer follows through with that threat, Yahoo could face tough questions from some shareholders angered that it has refused Microsoft's offer. Some Yahoo shareholders have already sued the company's directors for acting against shareholder interests in their handling of Microsoft's takeover attempt.

Yahoo has continued to insist that Microsoft's offer "substantially undervalues" it. Spokesmen for Microsoft and Yahoo declined to comment.

By: Matthew Karnitschnig & Robert Guth
Wall Street Journal; April 28, 2008

Yahoo-Google Plan Advances

Yahoo Inc. moved closer to outsourcing its search advertising to Google Inc. after an initial test of the system yielded what the two firms deemed positive results, people familiar with the matter said.

A broader partnership between the companies is now increasingly likely, the people said. Yahoo and Google said last week that they would undertake the test to evaluate the revenue potential of a broader search-ad outsourcing arrangement.

A deal might increase Yahoo’s cash flow by more than $1 billion a year, according to Citigroup Global Markets analyst Mark Mahaney.

But a partnership also might serve as needed leverage for Yahoo as it tries to ward off an unwelcome $44.6 billion bid from Microsoft Corp., of Redmond, Wash. Some view the potential combination as gamesmanship, particularly in light of antitrust concerns of a Google-Yahoo linkup.

A broad partnership between Google, based in Mountain View, Calif., and Yahoo could complicate Microsoft efforts but doesn’t derail it immediately. Yahoo could simply pull out of the partnership should it agree to a takeover by Microsoft.

Nevertheless, a deal with Google might make it easier for Yahoo, of Sunnyvale, Calif., to do a separate deal it has been deliberating with Time Warner Inc’s AOL. Yahoo has been in talks with New York-based Time Warner about merging with AOL. Time Warner would receive a stake of about 20% in the merged entity in return.

By: Matthew Karnitshnig
Wall Street Journal; April 17, 2008

Sizing Up a Post-Yahoo Ad Landscape

Marketing Executives See Potential New Order Under Proposed Deals

The latest developments in the Microsoft-Yahoo affair have advertising executives contemplating a drastically different landscape in the online-ad world.

"The flurry of news over the last 18 hours is the online-media industry's equivalent of nuclear war. Nothing short of a new world order in this space is up for grabs," says Tim Hanlon, executive vice president at Denuo Group, a unit of Publicis Groupe that explores new marketing technologies.

Consolidation, of course, usually reduces competition, and under some of the deal scenarios on the table, advertisers could find themselves having to work with a Google that has an ever-greater stranglehold on the online search market. But some of the potential deals-such as a Microsoft News Corp.-Yahoo combination or the proposed Yahoo-AOL agreement, which Yahoo hopes will help fend off an offer from Microsoft could wind up spreading the power rather than consolidating it.

While Google now dominates the market for paid search advertising and its potential new agreement with Yahoo would only add to that dominance-other areas of the online-ad market are up for grabs. Battles are raging over display advertising, social networking, online video and mobile, and pair-ups between Google competitors could create a few sizable players in these other fast-growing areas.

"You'd have a three-cornered hat," says Rob Norman, chief executive of GroupM Interaction Worldwide. "If you've got three major players driving to• innovate, then you'd have three pretty substantial platforms in play." GroupM is the parent company of WPP Group's media businesses and represents nearly $50 billion in global advertising spending across media-buying agencies MindShare, Mediaedge:cia, Maxus and MediaCom.

Meanwhile, Madison Avenue executives fear that a decision by Yahoo to outsource more of its search-ad sales to Google would place too much power in Google's hands and potentially drive up prices. The two companies announced Wednesday that they will conduct a two-week test, starting as early as next week, in which Yahoo lets Google handle up to 3% of its search-ad sales. Marketers say such a deal would ultimately raise the cost of doing business.

Google already has a dominant position in the online-search-ad market. It has deals to sell search advertising for a number of companies, including News Corp.'s MySpace, lAC/InterActive's Ask.com search engine and Time Warner's AOL, in which it owns a 5% stake. Google captured 71.2%, or $6 billion, of the U.S. search-advertising market in 2007, according to research firm eMarketer. Yahoo's paid-search sales came to $746 million in 2007, or 8.9% of the U.S. search-ad market.

Some Madison Avenue executives say a Yahoo-Google deal could make the market more efficient by implementing one system for the entire search marketplace, similar to what stock exchanges have done for trading equities. But other executives point out that Google's bidding system is based on algorithms that aren't completely transparent to marketers and say that advertisers would be vulnerable to the whims of that system.

Now, when advertisers buy search ads on the Web, they look at the types of consumers who use each of the different search engines and place bids accordingly. It usually works out that about 70% of the money spent by a marketer goes to Google, with the rest spread among Yahoo, Microsoft and other players. Marketers then adjust their spending among the search engines according to how each performs.

"If all of a sudden the cost-per-click prices go very high for Google and the return on investment goes down, you can instantaneously move money away from Google and into Yahoo. If you lose that option to move money into Yahoo or a Yahoo-Microsoft combination, the only option is to retreat from the search market, lower your spend, or grin and bear it" says Bryan Wiener, chief executive of 360i, a privately held agency that allocates $200 n search-advertising spending for marketers including H& General Electric's NBC Unive Office Depot.

Media buyers are also concerned about possible glitches as these companies try to integreate Meshing different technologies, sales teams and culture could ultimately slow innovation. Together, Yahoo and AOL have more than $1 billion in the past year to buy a series of ad-technology companies, each with the hope of building a one-stop shop for buying ads on the Web. Even alone, AOL has had a rock start, and its new ad-selling effort Platform-A, is just getting off the ground. Advertising executives fear such issues will be magnified by a larger deal.

"If things just get combined, but not integrated well, we'll have a real mess," says David Kenny, CEO of Digitas, the digital-marketing concerned owned by Publicis. "Ironically, it will favor the people who didn't do the deals because they will have a running start since they weren't involved."

By: Emily Steel
Wall Street Journal; April 11, 2008

Will Yahoo End In Traffic Jam?

Microsoft, News Corp. May Make Things Sticky Under a Three-Way Deal


As if Microsoft and Yahoo weren't a queasy-enough combination. Now comes the possibility of a messy, three-way, three-platform, three-headed, three-strategy, hostile-motivated combination of Microsoft, Yahoo and News Corp.'s Internet properties.

It all seems quite fantastical. But not necessarily if you are in charge at one of the participants. On an individual basis, a three-way deal would solve Microsoft's and News Corp.'s individual problems. The hitch is that the players also will create a collective mess.

Consider the incentives for News Corp. (the owner of The Wall Street Journal): It gets to contribute MySpace at a time when the valuation for the social-networking site is coming into question. Advertising on these sites has proved a less-than-brilliant opportunity, a reality revealed as Fox Interactive Media is expected to miss its $1 billion annual sales target by about $100 million. For Microsoft, the benefit is to convince investors that it is creating a viable alternative to Google.

But one need only look at some of the great serial acquirers of the 1990s to understand just how hard this truly is. Three-way deals rarely make it from announcement to the finish line. Then consider the combinations at Citigroup, where three separate sales organizations from three different parts of the Franken-bank still call on clients. Multiparty deals work best when the acquirers divvy up the target, as in last summer's $100 billion scrum over the Dutch bank ABN Amro.

Consider, as well, that the reason Yahoo is in this mess is because it can't operate its business as well as Google; Microsoft, because it can't compete as well as either Yahoo or Google; and MySpace still is trying to close the credibility and usability gap with Facebook. If these companies can't work well separately, why should investors trust them to do it well together?

By: Dennis K. Berman
Wall Street Journal; April 11, 2008

Yahoo Continues to Measure Tie- Up Prospects

As Microsoft bids for Yahoo, Google could come into play Yahoo Inc.'s directors met Friday to weigh the company's strategic options, but remained undecided about which path the Internet portal should pursue.

Yahoo's advisers gave the board their latest assessment of Yahoo's' options. These include deepening negotiations with Time Warner Inc.'s AOL and Google Inc., or engaging with Microsoft Corp. to discuss its unsolicited takeover offer.

Yahoo is in talks with Time Warner about combining with AOL. Under that scenario, Time Warner would fold AOL into Yahoo and make a cash contribution in return for an equity stake of about 20%, according to people familiar with the matter.

The proposed deal would value AOL at about $10 billion. That valuation excludes AOL's fading dial-up Internet-access business, which had complicated negotiations with potential partners in years past.

Yahoo also has been talking with Google. Wednesday, the two companies announced a two-week test in Steve Ballmer 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 pact likely would raise regulatory issues.

Friday's meeting capped a tumultuous week for Yahoo. It began with a testy exchange of letters between Microsoft Chief Executive Steve Ball-mer and the Yahoo board.

Frustrated that Yahoo hasn't embraced Microsoft's offer, Mr. Ballmer gave the board three weeks to cut a deal or face a proxy fight. He also hinted that Microsoft would cut its bid if Yahoo didn't agree to a friendly deal. Yahoo responded with a letter of its own in which it called his ultimatum "counterproductive."

Yahoo rejected Microsoft's unsolicited $44.6 billion stock-and-cash offer in February, saying that it undervalued the Internet company. Since then, the value of the offer has declined because of a drop in Microsoft's share price. It is currently valued at about $42 billion.

News Corp., owner of Dow Jones, the publisher of The Wall Street Journal, has held discussions with Microsoft about joining its bid but people close to the software company say it plans to pursue Yahoo on its own.

By: Matthew Karnitschnig
Wall Street Journal; April 11, 2008

Murdoch to back Microsoft's Yahoo bid


News Corporation is again wading into the tense takeover negotiations between Microsoft and Yahoo, this time discussing how it could back up the technology giant's bid for the web company.

A deal could create a powerful internet alliance between the News Corp-owned MySpace site, Microsoft's MSN brand and, if the takeover of Yahoo succeeds, its online network.

The New York Times, which today reported that negotiations were at a "sensitive stage" between News Corp and Microsoft, said that with Rupert Murdoch's backing the technology company could increase its offer for Yahoo.

"There's a long way to go before anything is definite," one source told the paper.

Another source said the terms were still being worked out, but that MySpace's parent company, Fox Interactive Media, would be put into the mix as part of the alliance between the two companies' internet assets.

The source also suggested that News Corp would put cash into the Microsoft bid for Yahoo.

When Microsoft made the unsolicited cash and stock offer for Yahoo on January 31, the deal was valued at $44.6bn. But a subsequent drop in Microsoft's share price has pushed the value down to $42bn.

Yahoo has rejected the offer, claiming it undervalues the company, but has also been pursuing various alternatives to revive its finances - including discussions with News Corp about a similar merger of internet assets.

Rupert Murdoch, the News Corp chairman and chief executive, reportedly met Yahoo chief executive Jerry Yang shortly after Microsoft made its offer earlier this year.

This revives the possibility of News Corp swapping MySpace for a stake in Yahoo and discussing an advertising partnership that would see the two partnering with Google.

The latest twist in the battle for Yahoo comes as the internet company announced a two-week experiment to bring Google's powerful AdSense service on to its search site in the US.

This test will be limited to showing Google ads against 3% of Yahoo's search queries. But it is a move designed to frustrate Microsoft, which responded by saying a definitive deal would "consolidate 90% of the search advertising market in Google's hands" and "make the market far less competitive".

Earlier rumours of discussions between Yahoo and Time Warner's AOL division have also been revived, with the Wall Street Journal reporting yesterday that the two sides are nearing an agreement over combining the two web companies.

Such a deal would reportedly see Time Warner paying Yahoo in cash for a 20% stake in the newly merged internet firm.

By: Jemima Kiss
guardian.co.uk; April 10, 2008

Microsoft Ratchets Up Deal Pressure on Yahoo

Ballmer Threatens to Launch A Hostile Bid if Internet Firm Doesn't Agree to Merger Soon

Microsoft Corp. is turning the screws to try to force Yahoo Inc. to agree to a takeover, but Yahoo remains focused on finding an alternative.

In a letter sent Saturday to Yahoo directors, Microsoft Chief Executive Steve Ballmer threatened a hostile takeover bid for the Internet company if it doesn't agree to a merger within the next three weeks. On Sunday, Yahoo was planning a written response to the letter, saying Microsoft had failed to address antitrust concerns and other issues raised by its offer, according to people familiar with the matter. The offer is currently valued at $42.2 billion.

Yahoo's reluctance to negotiate has given some Microsoft executives a window to voice their opposition to the proposed acquisition, say people familiar with the matter. Their skepticism probably wouldn't derail a possible deal, but it could at least limit Microsoft's appetite for raising its offer, these people say.

Some in Yahoo's camp view Mr. Ballmer's latest move as a negotiating strategy, and they believe there is still time for Yahoo to pursue alternatives to an acquisition by the software giant, say people familiar with the matter. One of the people says some members of Yahoo's management would prefer not to sell to Microsoft and are still looking for another deal that would allow Yahoo to avoid that.

The company's directors were scheduled to discuss the matter Sunday, but it wasn't clear, whether they came to any new conclusions.

On Jan. 31, Microsoft offered to acquire Yahoo for $44.6 billion, or $31 a share in cash and stock Yahoo's board rejected the offer, which has sin< declined in value to $29.36 a share because of substantial drop in Microsoft's share price. In p.m. trading Friday on the Nasdaq Stock Mark Yahoo's shares were up 23 cents at $28.36, who Microsoft's traded at $29.16, up 16 cents.

Since the unsolicited offer, Yahoo has been discussing alternative arrangements with companies that including News Corp. and Time Warn Inc. People familiar with the matter say the talks with Time Warner, which center around its folding its AOL Internet unit into Yahoo in return for a significant Yahoo stake, have heated up recently. The separate Yahoo discussions with News Corp., owner of Wall Street Journal publisher Dow Jones & Co., have cooled, these people say.

It's unclear how much patience Yahoo's shareholders might have for a drawn out pursuit of non- Microsoft options, or taste for deals that might represent less-certain financial returns than Microsoft's stock-and-cash offer. But one person familiar with the matter says there is some frustration that Yahoo's delay might have caused it to lose leverage in negotiating a higher offer from Microsoft.

Microsoft has been keeping close tabs on the views of Yahoo's major shareholders and, with Saturday's letter, it appears to be betting that investors want Yahoo to begin negotiations. Microsoft believes that a recent series of presentations that Yahoo management made to investors failed to persuade them that the company is worth substantially more than what Microsoft has offered.

If Yahoo's board doesn't agree to a sale in three weeks, Microsoft would be "compelled" to take its offer directly to shareholders and wage a proxy fight to replace Yahoo's directors, Mr. Ballmer wrote in his letter to Yahoo directors. He also implied that the offer Microsoft would make after the deadline would be lower than the one now on the table.

The amount of time any hostile effort would take is unclear, because Yahoo has so-called poison pill provisions designed to thwart hostile takeovers. Microsoft would presumably have to persuade shareholders to vote for its alternative slate of directors at Yahoo's annual meeting, for which Yahoo has yet to fix a date. If elected, those pro- Microsoft directors could then remove Yahoo's poison pill and accept Microsoft's offer. Under the law in Delaware, where Yahoo is incorporated, it could be forced to hold its annual meeting if it hasn't already done so by July.

Mr. Ballmer's letter, which comes after senior executives from the two companies failed to make any headway in two separate meetings in recent weeks, may make a friendly resolution of the standoff less likely. The sharply worded letter makes no secret of Microsoft's frustration at the lack of progress and could end up alienating Yahoo's board and management, some of whom already regard the software maker with a degree of suspicion.

In his letter, Mr. Ballmer suggests that worsening economic conditions have reduced Yahoo's market value, adding that "by any fair measure, the large premium we offered in January is even more significant today." Microsoft's original $31 per share offer represented a 62% premium to where Yahoo's shares had been trading before the offer.

Many Yahoo shareholders have been holding out for a higher offer and it is unlikely they would embrace a deal for less than the original bid. Still, Mr. Ballmer's threat underscores the frustration on the part of the software maker with the lack of any progress

The offer for Yahoo has generated some opposition within Microsoft, say people familiar with the situation. The plan to bid for the company was kept secret among a limited group of executives and advisers driving the strategy. Many other Microsoft executives learned of it only after Microsoft made the offer to Yahoo's board on Jan. 31.

Drivers of the deal at Microsoft include Senior Vice President Yusuf Mehdi and Senior Vice President Hank Vigil, two executives whose roles are to map out strategy and negotiate deals; they don't manage business groups.

If a deal with Yahoo goes through, Messrs. Mehdi and Vigil stand to play key roles in guiding the integration of the companies and could have greater clout to pursue other deals.

But other Microsoft executives have been raising concerns about the risks in buying Yahoo, say people familiar with the matter. Among the issues they have raised to other Microsoft executives and outsiders is the huge challenge of merging the two companies' computer systems that handle functions such as graphical display advertisements on Web sites. The skeptics argue that Microsoft should continue to build its online systems and services - a strategy that so far has fallen short of Microsoft's expectations - and make a number of smaller acquisitions complement that effort.

Another worry among some insiders is who would lead the complex integration. Microsoft has limited experience in digesting very large acquisitions and las recently lost several executives who might have helped in that undertaking.

Such opposition, say some people, is to be expected in a deal the size that Microsoft is pursuing with Yahoo. Microsoft also has a culture that allows debate to thrive - sometimes at the expense of making timely decisions. At this point, doubts about the deal don't seem strong enough to scuttle it, say the people familiar with the matter.

"There is no dissension among the people who are making the decisions," said one person close to Microsoft. This person said top executives including Mr. Ballmer have been level-headed since the start about the challenges and risks of completing such an acquisition.

By: Kevin Delaney, Robert Guth, and Matthew Karnitschnig
Wall Street Journal; April 7, 2008

With Microsoft Corp. and Yahoo Inc. firing tense public missives at each other, the real question is whether Microsoft is willing to pay the additional premium Yahoo wants to get a deal done quickly.

Monday, Yahoo's board said in a letter to Microsoft that it wasn't opposed to selling itself as long as the price "fully reflects the value of Yahoo, including any strategic benefits to Microsoft." In the meantime, it again rejected Microsoft's original offer-currently valued at $29.36 a share-as inadequate. The letter from Yahoo followed one from Microsoft on Saturday in which the software maker threatened a hostile takeover, of Yahoo if the Internet company' doesn't'agree to a merger within the next
three weeks.

"We consider your threat to commence an unsolicited offer and proxy contest to displace our independent board members to be counterproductive and inconsistent with your stated objective of a friendly transaction," says the Yahoo letter addressed to Microsoft Chief Executive Steve Ballmer and signed by Yahoo Chairman Roy Bostock and CEO Jerry Yang.

Despite the sharp exchange, many analysts believe Yahoo wUl eventually fall into Microsoft's grasp. It hasn't revealed any serious alternative deals in the more than two months since Microsoft made its unsolicited offer public. Some investors also question whether Yahoo has lost its leverage to secure a higher price as time has dragged on.

Some in Yahoo's camp believe there is still time for the company to pursue alternatives, say people familiar with the matter. But there's a rough consensus among analysts and investors that two other scenarios are more likely.

In the first, Microsoft would signal to Yahoo that it's prepared to raise its offer and the two would enter friendly negotiations. In the second scenario, Microsoft would decide to wait it out and prepare a hostile effort, hoping that Yahoo will come to the table in the meantime.

Getting into a protracted battle has been a distraction for Microsoft's senior management at a time when the company can ill afford to miss a beat in its competition with Google Inc. and other rivals. Prolonged uncertainty also increases the likelihood that Yahoo's top talent will go elsewhere. A friendly approach could ensure smoother sailing when it comes time for a regulatory review of any deal.

There has been some contact: Senior executives from the companies have met at least twice in recent weeks, though they haven't made any real headway. Some analysts believe Yahoo has little choice over the long run but to enter negotiations in the hopes of securing a higher price.

Some major Yahoo shareholders have suggested they would embrace an offer closer to $35 a share. But because of the passage of time and the deteriorating economic climate, that's probably unrealistic. Supporting a $35 bid would cost Microsoft an additional $8 billion, and Mr. Ballmer would have difficulty justifying that to his own shareholders after publicly suggesting that Yahoo's value has declined since January.

There are no signs Microsoft is willing to raise its offer. People close to the company have said it doesn't want to bid against itself by increasing the offer without negotiations. Mr. Ballmer, in his Saturday letter to Yahoo directors, suggested that worsening' economic conditions have reduced Yahoo's market value.

When extended on Jan. 31, Microsoft's cash-and-stock offer was valued at $31 a share, a 62% premium over the price at which Yahoo was trading. The value is lower now because of a subsequent decline in Microsoft's share price. Each dollar per share that Microsoft raises its offer would sweeten the deal by about $1.4 billion, and the software maker would have to pay more than $2 billion more just to get back to the value of its original bid.

On Monday, Yahoo ended 4 p.m. trading on the Nasdaq Stock Market down 2.3%, or 66 cents, at $27.70, and' Microsoft was unchanged at $29.16.

Some executives at Microsoft have aired their skepticism about the deal in recent weeks, accord-' ingto people farniliarwith the matter. These people don't expect their view to torpe4,o Microsoft's offer but say it coUld limit Microsoft's willingness to raise its offer.

Some bankers not involved in the transaction say Yahoo miscalculated and should have entered negotiations right away to secure a higher price and get a deal done quickly. Instead of sitting down to negotiate with Microsoft, Yahoo decided to explore other options, none of which currently appears likely. Now, any premium over the original value Microsoft offered
will likely be measured in pennies, not dollars, the bankers say.

Meanwhile, there's a chance Microsoft and Yahoo could become embroiled in the second, hostile scenario, analysts say. Microsoft has been assembling a slate of candidates to nominate to Yahoo's board in case a deal isn't reached by the Steve Ballmer three-week deadline it announced. Yahoo has so-called poison pill provisions designed to thwart hostile takeovers, but if shareholders voted in Microsoft's slate of directors at Yahoo's annual meeting, those directors could get rid of the pill provisions and reach an agreement. Microsoft might have to raise its offer at least back to $31 to guarantee shareholder support for its slate. Under the law in Delaware, where Yahoo is incorporated, it could be forced to hold its annual meeting if it hasn't already done so by July.

Yahoo and Microsoft each believe they would prevail in a proxy fight over the current offer, according to people close to them. There's yet another scenario. In this situation, Microsoft could lose patience with Yahoo and decide to drop its pursuit of the company. People close to Microsoft have dismissed that option, saying the company remains committed to a deal.

Yahoo has also been searching for alternatives to a Microsoft sale, something some executives would prefer to the Microsoft option, according to a person familiar with the matter. Discussions with Time Warner Inc., which center on it folding its AOL Internet unit into Yahoo in return for a significant Yahoo stake, have heated up recently. But people familiar with the matter consider such an agreement a long shot because it would be so complex.

Most observers don't see any possibility for Yahoo to escape Microsoft's clutches. Yahoo's only hope is a substantial upturn in the markets, which is unlikely anytime soon, they say. If Microsoft were to abandon the bid, Yahoo's shares might well plunge into the teens, exposing the company to shareholder litigation.

By: Kevin Delaney and Matthew Karnitschnig
Wall Street Journal; April 8, 2008

Microsoft Offers 45 Billion To Buy Out Yahoo

As long predicted by Peak Positions - Microsoft Bids For Yahoo.

Here's a video clip on Microsoft's formal offer to buy Yahoo. This CNET recap contains many of the details and some interesting interviews. One consultant in this piece actually calls Microsoft "desperate", we were wondering how she actually defines desperate ... let's see $56 Billion in liquid assets and much more in the immediate product pipeline makes Microsoft desperate in what way?

Well we all know the Redmond crowd took a nap, missed the bus and is more than a few years late in arriving at the keyword search party. It is still quite a stretch though to term Microsoft as desperate. Yes, Ballmer and Gates are making many new moves to fend off the open office movement, mashups, and online software delivery.

Yet this move to take over Yahoo further signals MSN's intent to increase their share and foothold in the keyword search industry and is not a move of desperation. Microsoft's move to buy Yahoo is a long calculated projection on the future evolution of their enterprise. Microsoft is only beginning to wake up and understand just how powerful the keyword search medium truly is.

MSN has been weighing two options for several months in seeking to become a meaningful search engine:

1) Dedicate more time, staff and resources to gain more share of search.

2) Spend Cash and Stock to acquire more search share immediately.

This offer to buy Yahoo symbolizes Microsoft's intent to address keyword search in the short term, increase their share now and shore up any weaknesses before Rupert Murdoch or Michael Bloomberg decide to apply more resources and further ignite the search wars.

What strategy does the MSN senior management team have outlined for pulling in the Yahoo portal? Do they have the skills and are they prepared to overhaul search strategies at both of these failing search engines?

First Things First ... Here's Mocrosoft's Bid For Yahoo