It's Yahoo's move, as Microsoft turns up heat
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By Eric Auchard and Anupreeta DasSAN FRANCISCO/NEW YORK (Reuters) - Yahoo Inc continues to work toward finding an alternative to being bought by Microsoft Corp , a day after the software giant threatened to lower its $42.4 billion bid.Talks between Yahoo and Time Warner Inc's AOL division about an alliance have intensified, according to a person familiar with the matter.Earlier, Yahoo also held talks with News Corp , but these talks have cooled, said the person, who was not authorized to speak on the record about the matter.In a letter to Yahoo's board on Saturday, Microsoft Chief Executive Steve Ballmer set a three-week deadline to reach a deal, or see Microsoft cut its bid and mount a proxy campaign against Yahoo's board.Yahoo shareholders and analysts say Yahoo's options fall into two major categories; find an ally to help demonstrate Yahoo is worth more as an independent player or surprise the market with a strong show in its quarterly results.The consensus on Wall Street is that no "white knight" will emerge to whisk Yahoo away from Microsoft and its proposed $31 a share cash-and-stock offer currently valued at $42.2 billion."Microsoft is looking a bit frustrated. It is a pattern of stalling on the part of Yahoo," said Sanford C. Bernstein analyst Jeffrey Lindsay, who added that Yahoo's unwillingness to negotiate made it increasingly likely Microsoft will go hostile.Yahoo's board is reviewing Ballmer's letter and plans to issue a response on Monday, people close to the company said. Directors of the Sunnyvale, California-based company rebuffed Microsoft's original offer, saying it undervalues Yahoo and that it is seeking alternatives.Yahoo's management pitched the potential of alliances with Google Inc and AOL to shareholders as recently as last week, as part of a roadshow to convince institutional investors that its business can thrive without Microsoft.Yahoo executives also told investors that regulatory risks would undercut the value of any deal with Microsoft.One investor said his firm met Yahoo management last week, and executives said they were "far along" in discussions with these companies.Yahoo presented these alliances as a way to "monetize the different layers of their income statement," said the investor, who declined to be identified as the meeting was confidential.Another investor, whose firm holds about 1 percent of Yahoo's shares, said Yahoo management recently spoke to them about the "value-creating" potential of a tie-up with Google, centered on Yahoo outsourcing its search functions to Google.A Google spokesman declined to comment.COULD QUARTERLY RESULTS HELP YAHOO?The Microsoft deadline falls on April 26, four days after Yahoo, and two days after Microsoft, reports quarterly results.Given Microsoft's deadline, there is an outside chance Yahoo might choose to release its first-quarter results early, even this week, as a way to demonstrate that, despite "headwinds" in its business, it has strong pockets of growth.Cowen and Co analyst Jim Friedland said a solid showing in quarterly results could turn a few investor heads, but is unlikely to answer medium and long-term questions hovering over Yahoo's strategy. He thinks Microsoft will get its deal done."If Q1 results are really good, can it change things? The answer is definitely yes. But there are lots of things working against that happening," Friedland said.Yahoo's downbeat 2008 guidance issued in January was based on what the company knew before Microsoft made its offer. That bid has likely been a big distraction to business as usual over the past two months as sales people, product developers, even Yahoo advertising customers, wonder what the future holds."Here's the thing: Yahoo has never really had blowout quarters," Friedland recalls. "For people to say whoooaahh!!! Yahoo would have to see it meaningfully beat expectations like the kind of stuff Google was doing up until recently."Ballmer's letter argued the economy, the market for Internet stocks and Yahoo's share of the search and advertising business have declined since Microsoft made its offer.Microsoft's view of business conditions at Yahoo runs contrary to Yahoo's outlook. Last month, Yahoo forecast a rosy revenue outlook for the next two years."I really don't think Microsoft wants to put on a proxy fight. It's not their corporate MO (modus operandi)," says Kim Caughey, senior analyst at Fort Pitt Capital Group, which manages about $1.1 billion in assets including Microsoft shares.(Additional reporting by Daisuke Wakabayashi in SEATTLE; Editing by Martin Golan & Ian Geoghegan; eric.auchard@reuters.com)For more on Microsoft's bid for Yahoo, click
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