Microsoft, Yahoo Flounder in Pool of Potential Deals

Like drowning men snatching at a lifeline, Yahoo! Inc. (YHOO) and Microsoft Corp. (MSFT) may not have abandoned hopes of rescuing a deal.

The latest news, courtesy of the Wall Street Journal, is that the software giant is angling to enlist another company, such as New York media firms News Corp. (NWS) or Time Warner Inc. (TWX), in a deal under which Microsoft would buy Yahoo!'s search business, while its partner would combine its operations with Yahoo!. That¹s less a lifeline than a leaden balloon.

Clay Moran, an analyst with Stanford Group Co., says that breaking Yahoo! apart would value the Internet portal at only $24 a share, not much higher than the company's current market valuation.

Adam Lehman, managing partner at Rockridge Ventures LLC and a former senior business development executive at Time Warner's AOL unit, adds that a deal with multiple partners is fraught with structural, legal and regulatory complexities, greatly elevating the risks around the transaction. "At an operational level, it seems like a relatively elegant way for Microsoft to get what it wants and for AOL or News Corp. to advance their core interactive businesses," he says. "But Yahoo¹s just a lamb going to slaughter in this scenario."

Lehman does say that Yahoo! must take bold action in revamping its business or run the risk of a steady erosion of value. And he compares Yahoo! travails to AOL's decline in recent years from one of the most highly valued Web franchises to an Internet also-ran.

"There's a self-fulfilling prophecy playing out here whereby as Yahoo! stumbles and bumbles through its discussions with Microsoft and others, it is disconcerting to Yahoo's second level management, Yahoo!'s partners, and it's tarnishing Yahoo!'s brand with the net effect that Yahoo!'s business is suffering," Lehman adds. "Once the story starts to turn on you, even though the story may relate to corporate level issues, it bleeds down into consumer perceptions and operating results."

Bill Burnham, managing general partner with Inductive Capital, is blunter in his forecast for Yahoo! if it remains independent, even after its recently announced shared search deal with rival Google Inc. (GOOG).

"I don¹t know how this is going to end, but one thing's for sure -- it's going to end badly for Yahoo!," he says. "They ran out of the frying pan and into the fire. The employees that they have left are pissed that a major payday evaporated, and the entire search division knows that their days are numbered thanks to the Google deal. Instead of a major payday and a shot at winning the search battle, their two main options now appear to either become Google's vassal or get torn apart by a pack of hungry wolves."

By contrast, such a plan Yahoo! could appeal to Carl Icahn, who is waging a proxy battle Yahoo!. Although the activist investor has called for a deal to sell all of Yahoo! to Microsoft, he doesn't appear to have enough backing from other large shareholders to seize control of Yahoo!¹s board and engineer such a transaction. But floating a piecemeal sale of Yahoo!, especially if the plan has Microsoft's blessing, could provide more support for Icahn's slate.

Comments

[R+L]

There have been as many "opinions" on what should be done, how it should be done, and who will benefit most from doing it, as there are analysts covering this debacle. The one fact that is indisputable is that none of these experts have any idea what will happen or when. At this point it is not about the stock owners getting shafted.... its all the people in power saving face.......