NEW YORK ? The Wall Street Journal reported Wednesday that Yahoo and Time Warner’s AOL are closing a deal to combine their Internet operations, a move aimed at thwarting Microsoft’s effort to acquire Yahoo.
But Microsoft is recrafting its assault plan by talking with Rupert Murdoch’s News Corp., publisher of The Wall Street Journal, about mounting a joint bid for Yahoo, people familiar with the matter said. Microsoft and News Corp. have yet to reach an agreement on joining forces but one person apprised of the plan described the discussions as serious. Such a deal would combine three of the biggest Internet properties: News Corp.’s MySpace, Microsoft’s MSN and Yahoo.
The AOL-Yahoo deal under consideration would include the repurchase of some Yahoo shares at a price above Microsoft’s offer. Taken together with a possible search advertising pact with Google Inc., the plan could give Yahoo an alternative to a Microsoft takeover — although many analysts and investors believe Microsoft will ultimately win out. At the least, Yahoo’s efforts could give it more leverage to negotiate a higher price from Microsoft.
Under the terms being discussed between Yahoo and Time Warner, the latter would fold its AOL unit into Yahoo and make a cash investment in return for about 20 percent of the combined entity, people familiar with the situation said. The deal, which wouldn’t include AOL’s dial-up access business, would value AOL at about $10 billion. As part of the deal, Yahoo would use the Time Warner cash and additional funds to buy back several billion dollars worth of its own stock at a price somewhere in the middle of the range between $30 and $40 a share, the people said.
Yahoo is also talking to Google about outsourcing search ad sales. On Wednesday, the two companies announced a test deal around search advertising.
Microsoft kicked off the battle for Yahoo nine weeks ago with a cash-and-stock offer then valued at $44.6 billion, or $31 a share. As of Wednesday, the deal is worth $29.24 a share because Microsoft’s share price has declined. Yahoo shares closed at $27.77, up seven cents, or 0.25 percent, in 4 p.m. trading on the Nasdaq Stock Market Wednesday.
A joint deal by Microsoft and News Corp. to acquire Yahoo would create a huge one-stop shop for online advertisers and bring together some of the largest players in social networking, online news and email.
Microsoft and News Corp. have each discussed with Yahoo the possibility of a three-way alliance, according to one person familiar with the matter. This person says News Corp. might put up some cash as part of the deal.
But a three-way combination would also increase the complexity of any post-deal integration in areas such as combining computer systems, streamlining management and sorting out brand strategy. It might also be hard to drum up Yahoo shareholder support for such a more complicated scenario.
Yahoo has resisted Microsoft’s advances, saying the offer was too low. Originally News Corp. held its own discussions about a partnership with Yahoo, and the two sides continued the talks in recent weeks. But people close to the companies say those discussions have stalled. One person familiar with the matter said News Corp. started talking to Microsoft several weeks ago.
Even if it reaches an agreement with AOL, Yahoo may have difficulty persuading its shareholders that the combination is more attractive than Microsoft’s original proposal, which offers a more certain short-term financial return.
Any AOL deal would be taken to Yahoo shareholders for approval but wouldn’t require approval from Time Warner shareholders, people familiar with the situation said.
Legg Mason Inc. portfolio manager Bill Miller, a big holder of Yahoo shares, said in an interview Tuesday that he was skeptical Yahoo could find an alternative palatable to shareholders. Another major Yahoo investor Wednesday said the AOL combination, along with the share repurchase and Google ad pact, likely couldn’t match the original $31-a-share value of Microsoft’s offer, at least in the short term.
Microsoft also has yet to fully win over Yahoo shareholders. While Microsoft has threatened to take its offer directly to shareholders via a proxy fight, some of Yahoo’s major shareholders say they wouldn’t support that step unless Microsoft sweetens its bid.
One person familiar with the matter predicted Yahoo’s options will come to a head by early next week. Some in the Yahoo camp believe a threat by Microsoft Chief Executive Steve Ballmer Saturday to lower Microsoft’s offer and its poor reception by some Yahoo shareholders have increased the chances that Yahoo’s pursuit of alternatives will eventually trump an acquisition by Microsoft.
If consummated, the Yahoo-AOL discussions would unite two of the Internet’s largest Web sites. One person involved in the discussions cautioned that there was still “a lot of work to do” before a final agreement between AOL and Yahoo.
Yet there is also incentive for Time Warner to complete a deal. It has been struggling to find a viable strategy for AOL for years. AOL has lost most of its value since it combined with Time Warner in 2000.
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