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Microsoft and Yahoo: Will They or Won't They?

Microsoft and Yahoo: Will They or Won't They?

Conflicting rumors have surrounded Microsoft and Yahoo as speculators attempt to determine whether a purchase is imminent. Microsoft has reportedly denied that it's interested in taking another shot at buying the search engine, a company that rebuked its advances three years ago. Since then, continuing turmoil at Yahoo has again raised the question of a sale -- to Microsoft or a variety of other players.

By Rachelle Dragani
10/06/11 11:10 AM PT

Recent corporate shake-ups at Yahoo and anonymous insider reports to various media outlets added fuel to the fiery rumors that Microsoft is eyeing an acquisition of the search engine.

Though Microsoft reportedly denied assertions that it was looking into buying Yahoo, the search engine's stock value jumped 10 percent on the rumors that a purchase was imminent, leading to speculation that the struggling company is in desperate need of a buyer.

Any potential suitor would presumably see a much mellower price tag than the US$47 billion Microsoft offered Yahoo in 2008. Now, three years and several missteps later, Yahoo has a current market value of $18 billion, and it recently ousted CEO Carol Bartz while committing to explore strategic alternatives.

Microsoft isn't the only company reported to be flirting with Yahoo. It joins private equity firm Silver Lake, Russia's Digital Sky Technologies and Alibaba Group, of which Yahoo already owns 40 percent, as potential buyers.

Yahoo did not respond to the E-Commerce Times' requests for comment by press time, and Microsoft declined to comment on speculation.

Not Microsoft's Ball Game Anymore

Three years ago, a Yahoo acquisition might have been a home run for Microsoft. Buying it now could still benefit the software giant, though Yahoo has lost traction to competitors like Google and Facebook since the last time the two companies spoke of an purchase.

"Looking at the business, Yahoo has continuously lost relevance in the area of display advertising, particularly as companies, most significantly Facebook, have been able to draw consumers and place advertising at the same time," Rick Summer, analyst at Morningstar, told the E-Commerce Times.

Yahoo has also seemingly lacked the corporate vision that allowed tech giants like Google to expand beyond search and become leaders in content, mobile and social aspects of the Web.

"Advertising hasn't been as important lately as social network benefits, and having information online. Something like Facebook has become much more valuable than just providing news and search. Yahoo has sort of dropped the ball and missed in the social networking, cloud services, mobile and Web components that are so important now," Dana Gardner, principal analyst at Interarbor Solutions told the E-Commerce Times.

Other Options

Outside of Microsoft, Yahoo could possibly entertain other buyers. Media companies such as Disney might be a better fit for the advertising-based search engine.

"Disney makes a bit more sense. We've seen these media companies like AOL and CBS really looking to move to more full-service Web properties. Disney being a full media company, they're really looking to go even further towards the Web, the cloud and online, so there might be synergy with the Disney portfolio that could be intriguing," said Gardner.

Another possible partnership would be one that splits Yahoo and its Asian assets, Yahoo Japan and Alibaba Group. Yahoo owns 40 percent of Alibaba, and Alibaba Chairman Jack Ma is reportedly very interested in buying at least the Asian portion of Yahoo's holdings.

"I think with Yahoo you will have two different companies -- one with the Asian assets, which has a completely different driver, and then one with the struggling American part. It makes sense to have two different buyers and leave the Asian assets in the hands of Jack Ma and the people who understand the Asian market," Laura Martin, lead media analyst at Needham & Company, told the E-Commerce Times.

That option might also be more palatable to investors nervous about putting faith in a company over which they have little -- or any -- control in regard to global holdings.

"The bulk of Yahoo is tied up in assets you have absolutely no control over. Yahoo doesn't do anything with Alibaba and doesn't do anything with Yahoo Japan, so our feeling is you don't want to make an investment that's predicated on companies that Yahoo doesn't have any control over," said Summer.

Desperation at Yahoo

Regardless of whether Yahoo will sell, and to whom, the mixed messages, recent executive shake-ups and volatile stock value are indications that Yahoo is in need of strategic change.

"The company is in turmoil, it's without a CEO, it's declining in relevance, it has reportedly an unstable employee base, and at the same time it is without question a turnaround situation. To turn around a core business, you've got to have a pretty clear strategy in the company, which is the opposite of where they are right now," said Summer.

A company desperate to sell could make for a great value at the auction table or in the bargaining room, especially if a company feels it can make the steps that Yahoo has been missing in the past few years.

"A buyer would have to believe that he could make a difference and do something. He would have to believe he could take those execution shortfalls and turn them around, because in his mind he's be buying it cheap. If he thinks the company is doing everything within its power to be successful, he's not going to buy it," said Martin.

The break may not be a clean one, either.

"If history is any indication, it won't be a smooth process," said Gardner.


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