Yahoo seen in News Corp talks but analysts dubious
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By Kenneth Li and Eric AuchardNEW YORK/SAN FRANCISCO (Reuters) - Yahoo Inc is reportedly in talks with News Corp to combine their Web properties, but Wall Street analysts rained scorn on the likelihood of a deal that can fend off Microsoft Corp's $42.1 billion bid for Yahoo.News of the talks was first reported by the Silicon Alley Insider blog on Monday, then followed by TechCrunch, which said one proposal would involve a cash infusion from Rupert Murdoch's News Corp and an unnamed private equity fund.The Wall Street Journal reported on its Web site that a deal being discussed would give News Corp more than a 20 percent stake in Yahoo. It said the talks valued News Corp's MySpace online hangout at around $6 billion to $10 billion."Any options other than Microsoft are all ... fraught with serious consequences," said Sanford C. Bernstein analyst Jeffrey Lindsay. "The management has left it to so late in the day to really find any alternative. They have basically backed themselves in the corner."Analysts say that alternatives such as a partnership with News Corp might have long-term strategic benefits for Yahoo, but would not give its shareholders an immediate investment return like Microsoft's buyout offer.Thus, if the Microsoft bid were to fall through, analysts expect Yahoo shares to plunge. The stock was trading below $20 a day before Microsoft's $31-per-share offer was made public."It is hard to imagine that Rupert would be willing to put enough cash in the deal to make it interesting to Yahoo shareholders," RBC Capital Jordan Rohan said."Yahoo stock would settle out at $15 share depending on how much cash was in the picture," Rohan said, reflecting a widely held sentiment on Wall Street that Microsoft's price has raised an insurmountable hurdle to alternative bidders.Yahoo shares closed up 1.05 percent at $29.88 and Microsoft shares rose 2.19 percent to $28.96. Yahoo continues to trade at a 2 percent premium to Microsoft's half-cash and half-stock offer, indicating investors are expecting a higher bid.Short-sellers also appear to have backed away in the last few days from bets against a Microsoft-Yahoo deal, according to data from Data Explorers Ltd, which tracks securities lending.When Microsoft's bid was made public on February 1, the amount of Yahoo shares loaned out to short sellers and others spiked, but it has been falling since last Tuesday. Stock lending data is often viewed as a proxy for shortselling interest because short sellers are typically the biggest borrowers of stock.On February 1, about 1.98 percent of Yahoo's market capitalization was loaned out, according to Data Explorers. That figure rose to 2.72 percent on February 5, but as of February 11 it was back down to 1.95 percent.ON AGAIN, OFF AGAINYahoo on Monday turned down Microsoft's bid, saying it did not properly assess the worth of the Web pioneer's wide audience, online advertising investments, cash-generating ability and growth prospects of overseas holdings.Microsoft responded by saying its offer was "full and fair" and it reserved the right "to pursue all necessary steps," but it did not give details on what it would do next.Many analysts expect Microsoft to sweeten its bid to at least $35 a share and as much as $40 a share.That has worried some shareholders who are concerned about when the deal would pay off. Money Manager Bob Olstein, who owns about 1 million shares of Microsoft, is urging the software company to resist pressure to raise its bid and to make it an all-cash deal."Under no circumstances should you raise your price," Olstein said in a letter to Microsoft Chief Financial Officer Chris Liddell, dated February 12 and made public on Wednesday. "We believe your recent offer for Yahoo is materially above Yahoo's value as an independent company."Olstein calculated that an all-stock deal would dilute Microsoft's earnings by 19 cents per share, compared to a more modest dilution of 7 cents per share for an all-cash deal.Microsoft, which has $21.3 billion of cash on its balance sheet, would have to borrow more debt for an all-cash offer.Murdoch has held on-again, off-again talks with Yahoo over the past year. He told analysts and reporters on a conference call last week that News Corp was not interested in bidding for or pursuing any transaction with Yahoo.News Corp and Microsoft declined comment on Wednesday. Yahoo also declined comment and reiterated the company's position that its board continues to explore its options.News Corp shares fell 0.62 percent to $19.25 on the New York Stock Exchange.(Additional reporting by Daisuke Wakabayashi in Seattle, and Cal Mankowski and Emily Chasen in New York; Editing by Gary Hill)
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