Microsoft searches for new Yahoo deal

Just two weeks after Yahoo sent Microsoft packing, the software giant is sniffing around again...

Last Updated: 31 Aug 2010

Microsoft said this weekend that it is exploring an alternative tie-up with Yahoo, just a fortnight after it had a $47.5bn takeover bid rejected by the search engine’s board. Apparently the new deal under discussion would fall short of a full takeover, although Microsoft refused to rule out lodging another bid for the whole company at some point. Clearly boss Steve Ballmer has no intention of taking no for an answer…

The news should go down well with Yahoo shareholders, most of whom were distinctly unimpressed by their board’s decision to reject the previous Microsoft offer, despite it being a 72% premium to the share price beforehand. The most vocal critic has been the billionaire corporate raider Carl Icahn, who’s spent the last few weeks building up his stake in Yahoo – he’s currently lobbying shareholders to get rid of the entire board, proposing that he and nine allies get to call the shots instead. And he’s definitely not a man who likes taking no for an answer...

Microsoft was a bit hazy on the details of this proposed new deal, but it’s likely to involve some kind of partial acquisition or joint venture. And since Google remains the jumbo elephant in the room for both companies, it seems safe to assume that it’ll be something that would give Microsoft a foothold in the lucrative online advertising market. One option being touted is a merger of the two companies’ online search business, which might give them the kind of scale they need to compete more successfully with Google.

Yahoo was also fairly non-committal – admitting only that the two companies were discussing various ‘value-maximising’ options – but this looks like being a neat way out for CEO Jerry Yang and the board. By rejecting the bid they’ve managed to provoke a potentially fiery boardroom scrap, as well as raising questions about their company’s competitive future. This way they get to join forces with Microsoft without giving up their independence completely – which might well be enough to get Icahn off their backs.

Whether it’s such a good deal for Microsoft remains to be seen. But it certainly looks as though Ballmer’s tactics are paying off: by withdrawing his previous bid in a very public way, and then being linked with various other targets (like AOL and Facebook), he’s obviously cranked up the pressure on the Yahoo board. Now it looks as if he might get his way – particularly if Icahn has anything to do with it.

Like many other entrepreneurs who cash in their chips via a flotation, Yahoo co-founder Yang is clearly finding out the hard way that he doesn't own his company any more - and it's a lot harder to do what you like when you've got an angry mob of shareholders breathing down your neck...

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