Monday, February 11, 2008

San Jose MercNews: Report: Yahoo may buy AOL

By Elise Ackerman
Mercury News
Article Launched: 02/11/2008 01:30:22 AM PST

It was Silicon Valley's equivalent of a Sunday night cliffhanger.

As Yahoo Chief Executive Jerry Yang prepared to send a letter to Microsoft Chief Executive Steve Ballmer rejecting Microsoft's $44.6 billion bid, the possible future of the Internet icon suddenly took an unexpected twist.

Word began leaking that Yahoo was considering buying AOL in an effort to put together a credible alternative to Microsoft's bid for shareholders, who will see the value of their investment plummet without one.

The report in the Times of London was not confirmed, but it quickly caught the eye of analysts, reporters, venture capitalists and technology industry employees who have gotten hooked on the drama of Yahoo's uncertain future.

Once the Internet's brightest stars, the prospects of Yahoo and AOL are rapidly dimming compared with Google. While Google's advertising revenue has increased by more than 50 percent each quarter during the past year, Yahoo and AOL have been lucky to grow in the teens.

The two portals are still very popular, however. According to comScore, a measurement firm, Yahoo had 137 million unique visitors in December and AOL had 120 million, compared with 133 million for Google.

Jeffrey Lindsay, an analyst with Sanford Bernstein, said a combination of the two companies, combined with other moves such as outsourcing Yahoo's search advertising to Google and significant layoffs, could give Yang an alternative to present to shareholders.

In a pantomime played out in the press in advance of the official delivery of Yang's letter this morning, anonymous sources connected to the Sunnyvale company have let it be known that Yang will not consider a bid of less than $40 a share - $9 more than the $31 a share Microsoft offered on Feb. 1.

The Redmond, Wash.-based firm has not responded, letting the 62 percent premium it added to Yahoo's closing value on Jan. 31 speak for itself. But the tactics Microsoft has chosen, including going public with its bid, suggest it will play hardball before raising its price.

In an interview with the New York Times last week on the general topic of acquisitions, Microsoft's Chief Financial Officer Chris Liddell said, "You have to be willing to walk away."

More than a year ago, Ballmer negotiated in private with former Yahoo Chief Executive Terry Semel in an unsuccessful attempt to acquire Yahoo. This time, Ballmer publicly announced Microsoft's offer, blindsiding Yang and Yahoo's board of directors and setting the stage for a showdown with Yahoo's shareholders.

"It tied the hands of what Jerry Yang could do," said Jonathan Tower, a managing director at Citron Capital, a global private equity and venture capital firm, and author of the blog "Adventure Capitalist."

Once shareholders learned that a price had been set, they immediately demanded it, driving Yahoo's value from $19.18 to $29.20.

On Sunday, Eric Jackson, who rallied a shareholder rebellion that led to Semel's ouster last June, launched a new campaign in favor of negotiating with Microsoft. "This board doesn't have the moral authority to represent our interests," he said.

Jackson, president of Ironfire Capital, an activist investment firm in Naples, Fla., said he was relieved when Yang, Yahoo's co-founder, took over from Semel in June, but he has grown deeply disillusioned with Yang's ability to take the necessary steps to re-invigorate the company.

While some see Yang's expected rejection of Microsoft's bid as a negotiating ploy, Jackson said he is worried that Yang is serious. "My fear and a lot of other shareholders' fear is that Yahoo is seriously considering going it alone."

Jackson is not placated by the prospect of a tie-up with AOL. Microsoft's offer "is a no-brainer," he said, and rejecting it will cost shareholders.

"I think the stock is basically going to crash," he said.

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