Microsoft discusses alternatives to a full buyout with Yahoo

Yahoo is currently under a lot of scrutiny following the breakdown of takeover talks with Microsoft.  After Yahoo CEO Jerry Yang failed to assuage the fears of its shareholders, the shareholders struck back, led by billionaire investor Carl Icahn.  Icahn bought up a large stake in Yahoo last week and proceeded to push forward a new slate of directors, which if elected, could guarantee a sale to Microsoft.

Microsoft, however, insisted that it did not want to deal with Yahoo anymore and looked to achieve independent success.  However, the giant also would be foolish to let this opportunity pass, and is now softening its previous stance slightly.

It announced that it is talks with Yahoo about alternatives to a complete buyout.  A statement from Microsoft describes:

In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business.  Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo!  Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties.

The last sentence serves dually as a disclaimer and as a warning to Yahoo, as it seems to allude to the shareholder drama with Icahn.  Barring a complete sale, though, what options does Microsoft have?  It could either work out a partial acquisition, much like its stake acquisition in Facebook, only on a much bigger scale.  Yahoo and Microsoft could also work out some sort of joint online venture deal, in which they shared services.

Microsoft, however, was quick to warn in its statement that nothing is set in stone and that discussions may be dropped at any time.

When negotiations between Microsoft and Yahoo initially ended, Microsoft was offering a maximum price of $33 per share, while Yahoo said the offer significantly undervalued the company, and would not accept less than $37 per share.  Yahoo stock has seen rollercoaster action over the last couple weeks and is currently at $28.00 per share.

Analysts generally agree that Microsoft desperately needs to acquire Yahoo or make other major changes to succeed online, and avoid getting trampled by ever-energized competitor Google.  To date, since 2005, Microsoft's online operations have lost more than $1.5B USD.  Kevin Johnson, the head of Microsoft's online division acknowledges these problems, stating in a corporate email to employees, "The fact is that we are not where we want to be in this business yet and we've been in this position longer than we'd all like."

A big date for the Yahoo and Microsoft drama could come July 3, at the annual Yahoo shareholder meeting.  If a deal is not made before then, Icahn will likely try to get shareholders to vote on the challenger board slate.  If he succeeds, it would certainly dramatically alter the picture of negotiations.

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