Microsoft Seeks Partners For a New Run at Yahoo Plan Would Lead To Effective Breakup; By MATTHEW KARNITSCHNIG and ROBERT A. GUTH July 2, 2008; Page A1 http://online.wsj.com/public/article_print/SB121496732802022117.html
Microsoft Corp., positioning itself for a new run for Yahoo Inc.'s search business, has approached other media companies in recent days about joining it in a deal that would effectively lead to Yahoo's breakup, say people familiar with the discussions. Microsoft has held discussions with Time Warner Inc. and News Corp., among others, say people involved in the talks. In the past, Microsoft has floated an arrangement under which it would acquire Yahoo's search business and another partner, such as News Corp.'s MySpace or Time Warner's AOL, would combine forces with what remained of Yahoo. News Corp. is the owner of Dow Jones & Co., publisher of The Wall Street Journal. Microsoft's latest plan to aquire Yahoo's search business has too many variables, says S&P's Scott Kessler, who nevertheless sees Yahoo as undervalued. Some of the people familiar with these talks say they are preliminary and unlikely to result in a deal with Yahoo. Indeed, two weeks ago, Microsoft Chief Executive Steve Ballmer called Yahoo Chairman Roy Bostock to suggest they meet to discuss a new idea involving other partners, according to a person familiar with the matter. The meeting, scheduled for Monday, was subsequently canceled by Microsoft, which Yahoo took as a sign that Mr. Ballmer's efforts to find a partner have so far failed. Microsoft's overtures are the latest in a takeover battle for Yahoo that has gripped Wall Street and Silicon Valley for nearly half a year, leaving both sides bruised and scrambling to address strategic shortcomings in their businesses. Both tech giants are now feeling increasing pressure to reach an agreement, but their recent moves show they remain far apart on what such an agreement should look like. Microsoft, which made its unsolicited proposal to acquire Yahoo in January, later withdrew its bid for the whole company, after resistance from Yahoo to name a price and opposition from Microsoft's own executives and shareholders. As recently as a few weeks ago the company ruled out buying all of Yahoo. It sees acquiring Yahoo's search business as the quickest way to gain the assets it needs to take on Google Inc. Yahoo, it has meanwhile emerged, may have been more eager than it initially let on to sell the company in one piece. In mid-May -- weeks after Microsoft withdrew its bid -- Yahoo offered to sell itself to Microsoft for about $33 a share, a price Yahoo had earlier rejected, say people familiar with the talks. Microsoft rebuffed the advance. Investors and executives are scratching their heads over how a deal that seemed within reach wasn't consummated. People in Yahoo's camp say it believed Microsoft was never committed to acquiring all the company. Microsoft, meanwhile, came to conclude Yahoo's founders were obstructing a transaction, having long reviled Microsoft and its culture. The deal's collapse has wrought havoc on both companies. Shares of Sunnyvale, Calif.-based Yahoo have dropped 27% since mid-May, and it is battling dissident shareholder Carl Icahn, who seeks the sale of the company in its entirety and wants to replace its board in coming weeks. Redmond, Wash.-based Microsoft, meanwhile, has struggled to explain its future strategy to investors, with its shares falling 18% since the first offer. Yahoo remains skeptical about the viability of a deal that would break out its core search business. But the company remains open to discussing any proposal from Microsoft, people close to the company said. Still, what Yahoo executives regard as Microsoft's "erratic" behavior throughout the process has led them to conclude that a deal of any nature is unlikely. In recent days, representatives for Microsoft have met with Mr. Icahn to encourage him to press his proxy contest as a way to keep pressure on Yahoo to enter into a deal that would lift its share price, say people familiar with the matter. Yahoo, meanwhile, on June 12 announced a search-advertising partnership with Google Inc. aimed at boosting Yahoo's revenue. Yahoo denies criticisms that the deal could negate its chances of working with Microsoft. Yahoo Reconsiders New details are now emerging that show a critical period in which Yahoo, under increased pressure from shareholders, pushed to sell itself to Microsoft. The overture came on May 17, two weeks after Microsoft officially dropped its pursuit of Yahoo. That Saturday in Palo Alto, Calif., Yahoo CEO Jerry Yang, director Ron Burkle and chairman Mr. Bostock met with Microsoft's Mr. Ballmer. Messrs. Bostock and Burkle told Mr. Ballmer they were prepared to sell Yahoo for $33 to $34 a share, the price range Microsoft had offered before talks broke down, according to people familiar with the meeting. That would have valued the deal at about $47 billion, or $6 billion less than Yahoo's previous asking price of $37 a share. Mr. Ballmer waved away the approach. Instead, he focused on a separate, smaller plan for acquiring Yahoo's Internet search business, say the people familiar with the talks. The May 17 meeting was the culmination of some four months of deal making. Until then, Yahoo had held out hope that Microsoft wanted to buy the entire company. Afterward, it became clear to Yahoo that Microsoft wanted only its core search business, which Yahoo has been reluctant to part with. Initially, Microsoft executives were frustrated by their inability to start concrete talks with Yahoo executives. Microsoft made its bid on Jan. 31, but it took five weeks before Yahoo executives were willing to meet, on March 10. That meeting ended without discussions of the most important issue, price. Yahoo was concerned that a deal to combine two of the world's biggest Internet businesses would face intense regulatory scrutiny. It would likely take up to a year for a transaction of this magnitude to receive the necessary approvals. Yahoo's board felt it would be putting the company at risk if it didn't win specific assurances from Microsoft, such as a breakup fee, a promise to keep employees and a commitment that the value of the offer, half of which was stock, would be guaranteed. "We needed to know that they would go to the mat to get the deal done," said one person involved in the negotiations. But by the next month, the companies seemed closer to a deal. On April 15, the two sides met in Oregon at the Portland offices of Kirkpatrick & Lockhart Preston Gates Ellis LLP, the former law firm of Microsoft founder Bill Gates's father. With both companies concerned about leaks, Microsoft took pains to ensure that the meeting remained a secret. It instructed Mr. Yang and his coterie of advisers to drive to the back of the building, where a woman holding a closed red umbrella would be waiting for them at the loading dock. During the meeting, Mr. Ballmer, who prides himself on his math skills, wielded a long spreadsheet and questioned Mr. Yang and other Yahoo executives about their analysis of Yahoo's value and future prospects. Mr. Ballmer countered with financial models of how the combined company would work. He envisioned a search juggernaut that would establish the combined company as a bulwark against Google's progress. Yahoo executives were unimpressed with Mr. Ballmer's vision. If anything, they regarded the Yahoo pursuit as a crude solution to quell his obsession with Google. They would later refer to Mr. Ballmer's plan as "filling his Internet hole." Indeed, Mr. Ballmer spent much of the meeting discussing the threat Google posed to the two companies. Toward the end of the meeting, Mr. Ballmer asked Mr. Yang for a price. Once again, the Yahoo CEO demurred, saying that "we're not authorized to talk about price." Yahoo insisted that its regulatory concerns and other nonprice issues be addressed first. Microsoft's general counsel, Brad Smith, then told the group that Yahoo executives were avoiding "the elephant in the room" by not providing a number. "This is one of the strangest meetings that we've ever had," Mr. Smith said, according to people familiar with the meeting. The Yahoo side thought it was up to Microsoft to put forth a new offer. Targets of unsolicited offers typically avoid stipulating a price, arguing that they didn't put themselves up for sale. Also, there's no upper limit to what shareholders will accept and bankers often advise their clients to wait for the raider to return with a higher bid. On Friday, May 2, Yahoo's board reconvened. It authorized a deal with Microsoft at $37 a share. Founders Dispatched Mr. Yang and David Filo, Yahoo's co-founder, left at 5 a.m. the next morning for Seattle to deliver their counteroffer to Mr. Ballmer. The board believed that dispatching both founders would send a clear signal to Microsoft that Yahoo was ready to do a deal. Microsoft, meanwhile, told its executives to be prepared to work all weekend on a deal so that an agreement, if reached, could be announced on Monday. The two sides met at the airport, in a conference room overlooking the runway. The Yahoo camp was encouraged that Mr. Ballmer had donned a polo shirt in purple, Yahoo's color. For several hours, the men discussed Microsoft's proposal to acquire Yahoo's search assets. During a break, Mr. Ballmer boarded Mr. Yang's plane and the two discussed the deal in private. Others sitting at the rear of the plane could hear the two men laughing. At the meeting, Mr. Yang made his move, delivering his board's $37 a share counteroffer. He added, however, that he and Mr. Filo would prefer $38 a share, according to a person familiar with the meeting. During a break, Mr. Ballmer called a Microsoft executive with his conclusion: The Yahoo founders weren't moving enough on price and a deal wouldn't get done, according to a person familiar with the call. Mr. Ballmer's viewpoint had been coalescing for weeks. Toward the end of March, he began having doubts about a deal he initially thought would reach a quick conclusion, say people familiar with his thinking. As time dragged on, Microsoft had more time to mull the challenges of merging the companies and executives who opposed the deal had more time to voice concerns. Still, these people said, Mr. Ballmer was willing to do the deal at the right price. Messrs. Yang and Filo returned to Sunnyvale at about 4 p.m. that Saturday afternoon. Mr. Yang and his advisers gathered in a Yahoo conference room. It wasn't long before Mr. Ballmer called. "We're done," he told Mr. Yang, according to a person who was present. At first it wasn't clear whether Mr. Ballmer meant they had accepted the $37 offer or rejected it. When Mr. Ballmer explained that Microsoft was withdrawing its offer, Mr. Yang's face fell, according to a person who was present. Initially, Mr. Yang's advisers thought the call might be a tactic aimed at getting Yahoo to accept a lower price. But within a few minutes, Microsoft released a statement saying it had withdrawn its offer. In the days that followed, Yahoo's board was attacked by some investors and commentators for bungling the deal. Mr. Bostock pressed on. He suggested to Mr. Ballmer that they reconvene to discuss the matter. They agreed to a Saturday night meeting in Palo Alto, in the 11th-floor conference room of law firm Skadden Arps. The Microsoft CEO, who was about to embark for Budapest, was joined by Microsoft's finance chief, Chris Liddell, and Mr. Smith, the general counsel. Joining Mr. Bostock was Mr. Yang and Yahoo director Mr. Burkle. The tone of the meeting was friendly, according to those present. Mr. Burkle, a billionaire businessman and veteran deal maker, shared with Mr. Ballmer a passion for hockey. Mr. Ballmer, who grew up in Michigan, joked that the Detroit Red Wings were going to clobber the Pittsburgh Penguins, of which Mr. Burkle is a partial owner. No bankers were present. Early in the discussion, Messrs. Bostock and Ballmer lamented the bankers' influence on the negotiations, with Mr. Ballmer concluding that bankers had "screwed everything up." He said that Microsoft wasn't there to reopen its bid for the whole company. Instead, it was interested in a partnership over Internet search. Ready to Deal With time running short, Mr. Burkle decided it was time to dispose of the banker playbook. He told Mr. Ballmer that if Microsoft made another offer that night, Yahoo's board could have an answer for him by the end of the following day. The implication, according to people familiar with the matter, was that Yahoo was ready to do the deal on Microsoft's terms. After a 10-minute break, Mr. Ballmer returned and said he wasn't going to make another offer. Once the meeting had broken up, Mr. Burkle told Messrs. Bostock and Yang that they had done everything they could to woo Mr. Ballmer. "We took all of our clothes off," he joked. A week later, Messrs Ballmer and Yang met for a round of golf with mutual friends at Stock Farm, an exclusive club in southwestern Montana's Bitterroot Valley. The atmosphere was friendly but the encounter didn't result in a breakthrough. "They believed that we needed them much more than they needed us," one person close to Microsoft says. "Ultimately, we called their bluff." If that's the case, people close to Yahoo say, they wonder why Microsoft continues to knock on their door. Gregory S. Williams [EMAIL PROTECTED] [EMAIL PROTECTED] ******************************* * POST TO [EMAIL PROTECTED] * ******************************* Medianews mailing list [EMAIL PROTECTED] http://lists.etskywarn.net/mailman/listinfo/medianews
