Saturday, May 17, 2008

Dow Jones: Microsoft's Silence Isn't Golden To Some Yahoo Shareholders

May 16, 2008: 05:44 PM EST

SAN FRANCISCO -(Dow Jones)- As Carl Icahn's proxy fight has raised the noise surrounding Yahoo Inc. (YHOO), the silence from the company's erstwhile suitor, Microsoft Corp. (MSFT), is leaving Wall Street perplexed.

Observers are left to make educated guesses about Microsoft's stance, which could be the deciding salvo in the proxy fight. Three theories seem to be emerging: first, Microsoft remains interested in Yahoo, and may even have covertly signaled as much to Icahn, but is remaining silent as a negotiating tactic; second, the company has actually moved on, as it has publicly stated; and, third, the company remains undecided.

Microsoft's response is no minor statement. It could decide the outcome of the proposed $47 billion merger, as well as the future of each company's leaders, and transform the online advertising world.

For three months, Microsoft argued that acquiring Yahoo was key to its future growth strategy. Then, when deal negotiations got arduous, it turned around and showed the Internet company its hand.

The problem now is Wall Street can't tell if Microsoft wants to wave hello or goodbye.
Microsoft has declined to comment or get involved as Yahoo shareholders, along with Icahn, publicly questioned the Internet company's handling of the negotiations. Microsoft has maintained its public stance that it has moved on from Yahoo. Some, though, don't believe the software giant could walk away that easily from a company it had been pursuing for more than a year.

As a result, observers are left to make educated - sometimes well-argued - guesses based on the few facts available.

For example, analysts at Goldman Sachs aren't entirely convinced that Microsoft isn't interested.

"We believe that there should be substantial capex, cost, and revenue benefits to uniting Yahoo's and Microsoft's search businesses, and that it is in Microsoft's interests to dismiss talk of an acquisition, even if an acquisition remains its ultimate ambition," analyst James Mitchell wrote.

Andy Miedler, a senior technology analyst with Edward Jones, agrees that buying Yahoo, which would significantly bulk up Microsoft's hitherto underweight Internet advertising business, is too important to Microsoft's future plan to turn down.

"Microsoft's core businesses are going great but, down the road, it needs a growth pillar," Miedler said. "There are other alternatives, but none would bring the audience size Yahoo would provide." Edward Jones doesn't hold shares in either Microsoft or Yahoo.

It has also been argued that Icahn wouldn't have pursued a fight with Yahoo's board without some type of implicit acknowledgement of Microsoft's interest. Supporters of that argument point to the overlap of two people between Microsoft's reported board slate, which it never publicly revealed and has since disbanded, with Icahn's proposed slate.

This theory appears to have the support of traders, who have kept Yahoo's share price in the high $20s, where it has frequently resided since Microsoft made its offer Feb. 1. Yahoo shares closed Friday at $27.66.

The second possibility is that, as it claims, Microsoft really has turned the page and is pursuing different strategies. Henry Blodget, a former Wall Street analyst turned technology blogger, said, "We suspect that Microsoft really has 'moved on,' that - gradually, over the course of three months, (Chief Executive) Steve Ballmer eventually decided that buying Yahoo would be a mistake."

Microsoft may be considering the significant integration risk in the acquisition - especially after a lengthy takeover battle - and the possibility of rebellion from shareholders and staff who opposed the approach.

Shortly before Microsoft abandoned the deal, The Wall Street Journal reported that senior staff at the company were in open revolt at the prospect of the Yahoo deal. Shareholders who oppose the deal have communicated to Microsoft that the company hasn't at any point spelled out what the return on buying Yahoo would be.

But one shareholder who opposes the deal said Friday that Microsoft hasn't yet sent out a definitive enough signal that it is prepared to walk away to placate those who oppose the deal.
This shareholder concludes that the software giant is still undecided - the third theory.
Microsoft may be balancing the deal's strategic benefits with the possible negative public-relations implications of pursuing a deal that it has since publicly shunned, as well as the prospects of teaming up with Icahn.

Eric Jackson, who personally holds around 250 Yahoo shares but who has also assembled a group of small investors who collectively speak for around 3.2 million shares and wants the deal to happen, said Microsoft's reticence is likely "opportunistic." He believes Microsoft wants to take its time to make sure it has the strongest possible hand in negotiations.

He concedes, however, that there is a body of opposition, both among Microsoft shareholders and some staff, to the deal.

"Icahn doesn't have any leverage with these groups," Jackson said. "But he can underline the appeal of the deal and the increasing difficulty (for Microsoft) of catching up with Google (GOOG) in Internet advertising market share, without it.

"One has to presume that Microsoft has done a lot of thinking about this deal. Planning to make the biggest acquisition in a company's history isn't something that's done lightly, and it's hard to believe that the rationale for the deal has disappeared."

For the record, Microsoft again declined to comment Friday, but people familiar with the company again emphasized that it had "moved on."

-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455; jessica.hodgson@

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