Yahoo’s Unlikely Alternatives to Microsoft

http://bits.blogs.nytimes.com/2008/02/13/a-guide-to-yahoos-unlikely-alternatives-to-microsoft/

February 13, 2008
A Guide to Yahoo’s Unlikely Alternatives to Microsoft
By Saul Hansell

In the course of a terminal illness, a person will often start to cast about for alternative therapies: herbs, acupuncture, fasting on a Tibetan mountain. This exploration is simply part of the process of coming to terms with the painful truth.

That’s the best way to understand all the reports of possible deals coming from Yahoo. Jerry Yang, Yahoo’s chief executive, has engaged a bevy of creative bankers who are busy trying to concoct all sorts of fanciful business arrangements. They tried and failed to find any takers in the private equity world, and they have run proposals by the business development departments at all the usual suspects -– Google, AOL and News Corporation, among them, according to executives at those companies.

There is indeed some active discussion between News Corporation and Yahoo now (as first reported by Silicon Alley Insider). But News Corporation senior executives say they don’t believe anything will come of this.

The diagnosis is even more clear now than it was 12 days ago when Microsoft first announced its unsolicited bid: Yahoo will get sold to Microsoft. All that’s left to work out is the price.

In the meantime, here is a guide to all of the alternative therapies that Yahoo has been exploring, and why they are not safe or effective.

The key to understanding this is to realize that Yahoo is considering two types of procedures. The simplest would be to sell itself outright to some other company or group willing to outbid Microsoft. This is a long shot. No one but Microsoft and Google have the cash or stock market valuation to make this work. Private equity funds in this market can’t get their Visa credit limits raised, let alone borrow $50 billion.

The other possibility is that Yahoo could restructure in some way, perhaps taking an outside investment, so it can try to convince a majority of shareholders that it is better off as a standalone company than as part of Microsoft. This is unlikely to work because shareholders may well prefer the certainty of Microsoft’s offer, particularly given the lack of confidence in Yahoo’s current management. But it is at least possible to consider such a deal, so that is what is being discussed.

A big variable in any possible deal structure is the role of Google, which has indicated that it would like to help Yahoo fight off Microsoft. Presumably this means having Google sell search ads on Yahoo in return for a stream of guaranteed cash payments. There has been a lot written about how such an arrangement would undergo a lot of antitrust scrutiny. That’s true.

But another problem came up in the negotiations about this last week. Some people who toyed with making a run at Yahoo figured that they would get a big guarantee from Google and then borrow a lot of money against it in order to help finance their bid for Yahoo. It turns out, several dealmakers told me, that Google insists on minimum traffic levels in return for a guarantee of ad revenue. That provision doesn’t stop companies like AOL and News Corporation from cutting search ad deals with Google. But they are enough to stop a bank from backing such a buyout.

And if Yahoo simply announced a deal with Google, and no outside investment, it would have a hard time convincing shareholders that the extra money from search alone is reason enough to turn down Microsoft.

The deal under discussion with News Corporation, according to an executive briefed on the talks, involves a variation of a deal that it proposed to Yahoo last year. It would give Yahoo MySpace, its other Internet properties, some advertising credit and perhaps some cash, in order to take a 20 percent to 30 percent stake in Yahoo. A search deal with Google might be part of that too.

The hope would be that synergies with MySpace, as well as management help from News Corporation, would seem appealing enough to investors to rebuff Microsoft. Moreover, if News Corp. had a 25 percent stake, say, along with the 10 percent of the shares owned by Mr. Yang and David Filo, his co-founder, they would have enough of a voting bloc to win a shareholder vote if it came to that. Whether Yahoo really could play that tough, given its corporate governance structure, is an open question, however.

The deal proposed with Time Warner was similar: Trade AOL and perhaps some cash for a big stake in Yahoo. This has all the problems of the proposed deal with News Corporation and one more: Unlike News Corporation’s chief executive, Rupert Murdoch, who has already expressed interest in Yahoo, Jeff Bewkes, Time Warner’s new chief executive, is skeptical, according to an executive who has spoken to him. He soured on big Internet deals after Time Warner’s disastrous combination with AOL. Still, fixing AOL is one of Mr. Bewkes’s key challenges. So his business development staff is firing up its spreadsheets to consider the possibilities with Yahoo, according to a person familiar with the analysis.

But this person said that like Mr. Murdoch, Mr. Bewkes thinks it would be hard to win this one away from Microsoft.

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