by Shane O'Neill

Microsoft and Yahoo’s Search Deal Is Destined to Be

Dec 01, 20083 mins
Data Center

Microsoft and Yahoo are reportedly at it again. No matter how firmly Microsoft CEO Steve Ballmer says there will be no acquisition of Yahoo, it seems these two lovebirds can’t stop flirting.

The latest is a report in The Sunday Times of London that Microsoft is in talks to acquire Yahoo’s search business for $20 billion. Naturally, both companies have dismissed the report, with Fox Interactive President Ross Levinsohn, who the Times claims would be heading up such an acquisition, calling it “total fiction.”

If that’s so, then the fine folks at The Times are good fiction writers, given the amount of detail in the story about the terms of the proposed transaction.

But whether or not the Times report is truth or speculation or a bit of both, I think a Microsoft purchase of at least part of Yahoo will become fact some time in the near future. I have no concrete evidence of such a thing, but a couple signs point me in this direction.

First, it’s no secret that Yahoo board member and uber-investor Carl Icahn has been itching for both a deal with Microsoft and new leadership at Yahoo. He recently bought 7 million more Yahoo shares for $65 million. Yahoo has cost Icahn hundreds of millions of dollars since he purchased 5 percent of Yahoo earlier this year. Why would you invest more money in an ugly duck unless you knew it had a good chance to turn into a swan?

Yahoo CEO Jerry Yang, who repeatedly resisted a Microsoft acquisition, is stepping down. Buying more shares implies that Icahn is happy where things are going. It will give him more influence on decision-making (He now owns 5.4 percent of Yahoo) and possibly allow him to pick a Microsoft-acquisition-friendly new CEO and set the wheels in motion for some sort of deal.

What we can glean from the Icahn’s purchase of shares is that a Microsoft-Yahoo deal won’t go down anytime soon. I mean, how obvious would that look? Can you say insider trading? But a few months down the road, I can foresee some sort of acquisition.

Yahoo needs it. The market capitalization of the entire company is $16 billion and its share price as of last Friday was $10.58 per share. It’s share price was valued at $33 during Microsoft’s original acquisition offer last spring, and dropped to a low of $9 per share just a couple weeks ago.

When did it hit 9 bucks? Right after Steve Ballmer said explicitly on Nov. 19 at Microsoft’s annual shareholder’s meeting: “We are done with all acquisition discussions with Yahoo …We did our best. We thought we had something that made sense. It didn’t make sense to them. We’ve moved on.”

The power of those words caused Yahoo’s stock price to fall to $9 a day after it had jumped to $12 upon news that Yang would step down as CEO.

However, Ballmer did not shut out the lights and slam the door there. His parting words at the shareholders meeting about Yahoo have been hanging in the air ever since: “I think, an interesting possibility is to look at a search collaboration with Yahoo as we had proposed last summer. There’s no active discussion on that front but we’d be very open to it.”

Microsoft’s mere 5 percent share of the search market is sticking in the software giant’s craw and Yahoo is breaking down. Once Yahoo’s board appoints its new CEO, I think those “active discussions” will begin in earnest. And this time a Yang-less Yahoo won’t play hard to get.