Microsoft Holders Moody After Yahoo! Reprise
Updated from 2:19 p.m. EDT
SAN FRANCISCO --
Microsoft
(MSFT) - Get Report
investors have taken a dim view of the company's proposal for an alliance with embattled
Yahoo!
(YHOO)
.
In timing that positions Microsoft as a white knight instead of a nemesis, the Redmond, Wash., software company announced Sunday that it had proposed to Yahoo! "an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo!."
Investors took that to mean that a merger between the two, something Microsoft said it would not rule out, could still take place. In Monday trading, Microsoft's stock closed down 53 cents, or 1.8%, to $29.46, while Yahoo! was up 2 cents to $27.68.
Until Microsoft outlines the details of its latest proposal, investors are left to speculate how far-reaching a transaction would be -- and whether the companies would continue on joint or separate tracks.
The market is hoping Microsoft's latest proposal will lead to an acquisition, "but that's really a very premature conclusion," says Kevin Buttigieg of Stanford Group.
Microsoft's move is tactical rather than strategic, Buttigieg says. The software giant is attempting to prevent Yahoo! from turning to
(GOOG) - Get Report
to improve its cash flow, he said. Stanford makes a market in Microsoft and Yahoo! shares.
Yahoo! has been considering an arrangement to outsource its search advertising to Google.
"From Yahoo!'s standpoint, any arrangement with Microsoft could relieve pressure from the activist investors," Buttigieg says.Activist investor Carl Icahn
Thursday to unseat Yahoo!'s board of directors at the upcoming shareholders' meeting. Yahoo! shareholders have criticized the company for failing to come to buyout terms with Microsoft in April.
But such a deal wouldn't be a panacea. Buttigieg doesn't view an alliance as having an acquisition's ability to boost the two companies' search-advertising capabilities. "I don't see it as being the solution to both companies' Internet problems," Buttigieg says.
A Microsoft-Yahoo! agreement would have broader scope than what Yahoo! is planning with Google -- "more than just outsourcing search," says Matt Rosoff, analyst with Directions on Microsoft. A Microsoft-Yahoo! deal would likely involve a transfer of technologies and Internet properties and a partnership agreement.
From Microsoft's perspective, creating a business partnership makes more sense than an acquisition because it strengthens Microsoft's search and advertising business while possibly transferring older, non-strategic businesses, such as MSN and its Internet service provider properties, to Yahoo!. Some Microsoft executives have said they aren't interested in being a media or Internet content company, Rosoff adds. MSN sites get a lot of traffic, but they aren't critical to Microsoft's current business strategy, whereas they could boost Yahoo!
When Microsoft bought aQuantive, an advertising platform, software and services property, in 2007, it was an indication that the company would focus more on managing platforms and move away from providing Internet content, Rosoff says. Anything Microsoft can do to increase its search and advertising share would be positive, "if they could prove that what they're keeping has a good avenue for growth."
"My speculation is that this is what they wanted to do when they were talking to Yahoo! more than a year ago," Rosoff says.
Although the terms of Microsoft's proposal are pure speculation, says Forrester Research analyst Charlene Li, it's a question of how much access to Yahoo!'s search business Microsoft can get, either by buying or contracting for it. Buying Yahoo!'s ad and search technology would leave Yahoo! as a content provider, which would not be a bad thing, Li says. "They're a much better media company than technology company."
With shareholders breathing down the company's neck, Yahoo! may well be motivated to accept this proposal, which is at least Microsoft's third to date.
With Google, Yahoo! would find it hard to raise the kind of money it needs to hold off the shareholder revolt, Li said. "Yahoo! is running out of options."