Yahoo falls as deal fades

Shares dip 15%, but some say Microsoft will renew offer

Associated Press

May 6, 2008

Yahoo Inc.'s stock took a beating yesterday after Microsoft Corp. withdrew its $47.5 billion takeover bid, but the punishment wasn't as severe as many analysts anticipated because investors suspect the rivals eventually will renew their mating dance.

Although Microsoft has publicly indicated it will focus on measures besides buying Yahoo in its effort to make its Internet division profitable, several analysts predicted the software maker will revive its offer in the summer or fall if Yahoo can't snap out of a two-year funk that exposed it to an unwanted takeover in the first place.

"Should the frustration of [Yahoo] shareholders come to a boil, we believe [Microsoft] could re-enter the picture, essentially playing the role of the white knight," analyst David Hilal of Friedman, Billings, Ramsey & Co. wrote in a research note yesterday.

With similar opinions reverberating through the stock market, Yahoo shares shed $4.30, or 15 percent, to close yesterday at $24.37. That wiped out nearly half the gain they made after Microsoft made its bid Jan. 31. The drop left the company's market value about $12.5 billion below Microsoft's last offer.

Yahoo's stock price was $19.18 before Microsoft made its offer.

"I was expecting to see a more extreme reaction" to Microsoft's withdrawn bid, Stanford Group analyst Clayton Moran said. "Microsoft is trying to make it seem like it's not coming back [with another bid], but this somewhat muted reaction shows the market isn't buying it."

Meanwhile, Google Inc., whose dominance in online search triggered Microsoft's bid, seems poised to benefit no matter how the talks go from here.

Microsoft ultimately offered $33 per share, only to be rebuffed over last weekend. Yahoo co-founders Jerry Yang and David Filo, who still own a combined 9.7 percent of the company's stock, flew to Seattle to demand $37 per share - a price Yahoo's stock hasn't reached in more than two years.

The insistence on a higher price prompted Microsoft chief executive Steve Ballmer to yank the offer off the table.

"We engaged with them and we wanted to find a way to get something done. But they walked," Yang said yesterday.

If Microsoft returned with a "real offer and a real proposal," Yang said, "we would be happy to listen."

Yesterday's backlash was enough to turn up the heat on Yang and the rest of Yahoo's board, which unanimously rebuffed Microsoft. The unrest could lead to a rebellion at Yahoo's still-unscheduled annual meeting, where shareholders could try to oust the board. Yahoo must hold the meeting by mid-July.

The blow to Yahoo's stock also was cushioned by expectations that the company will soon announce it's turning over some of its advertising space to Internet search leader Google Inc., whose technology yields higher profits from commercial links.

But many analysts think working with Google could be a mixed bag for Yahoo. While Google could boost Yahoo revenue by anywhere from $850 million to $1.6 billion annually, it might also hurt Yahoo by undercutting the appeal of its own ad platform.

An alliance between Google and Yahoo also would cause regulatory headaches because antitrust officials would take a hard look at the partnership; the companies combined control more than 80 percent of the Internet's search advertising market.

While analysts debated how Yahoo and Microsoft should proceed, most agreed Google will benefit from the aborted takeover attempt.

Unnerved by the prospect of its two biggest rivals joining forces, Google reached out to Yahoo to help thwart Microsoft's bid.

Even if Google doesn't end up selling ads on Yahoo's heavily trafficked Web site, it has kept some of the Internet's biggest services out of Microsoft's clutches.

"We believe Google is a major winner given the failure of the Yahoo bid," Stifel Nicolaus analyst George Askew wrote in a note yesterday. "Google is well-positioned to continue to gain market share, benefit from any Yahoo [advertising] deal and exploit any ongoing chaos at Yahoo and Microsoft."

Google shares gained $13.61 to close at $594.90 yesterday.

Time Warner Inc. also appears to be in a better negotiating position if it decides to sell its struggling AOL subsidiary, as many analysts anticipate.

Yahoo had been mulling a possible combination with AOL's online operations as a defensive measure against Microsoft. Now, Microsoft may make a run at AOL if it's interest in buying Yahoo is dead. And if Microsoft enters the picture, Google might offer to increase its 5 percent stake in AOL to repel Microsoft.

A long list of Internet startups also could be in line for big windfalls if Microsoft and Yahoo step up their efforts to acquire more online weapons to challenge Google. And if Microsoft and Yahoo go shopping, Google has plenty of cash to get into bidding wars for potential takeover targets like Digg Inc., LinkedIn Corp. and Facebook Inc.

"Freed of one another, Yahoo and Microsoft are buyout prospectors: We would expect a rush-to-deal environment," said BMO Capital Markets analyst Leland Westerfield.

Most analysts believe Microsoft has to make some kind of bold move after its online division lost $745 million through the first nine months of the company's fiscal year. "Any notion of simply returning to the original, pre-Yahoo strategy is likely to be insufficiently defined and credible," Bernstein Research analyst Charles Di Bona wrote in a note yesterday.