Microsoft-Yahoo: The story so far

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Last week's twist in the Microsoft-Yahoo soap opera has seen special guest Google entering the scene again after an absence of a few months.

Yahoo has done a deal with Google to run Google ads alongside Yahoo search results in North America. This is a non-exclusive deal which Yahoo could repeat with other ad providers if it wanted.

The deal Yahoo has struck with Microsoft's biggest rival looks like a fit of pique. On Thursday, Microsoft said it wouldn't consider buying all of Yahoo, as it once tried to, but might just be interested in buying a part, such as the search business.

Yahoo immediately dismissed this idea as out of the question and pronounced all talks with Microsoft over. Finally and fully over.

Remember this all dates back to late January 2008 when Microsoft first formally approached Yahoo for US$31 a share, valuing the company at US$44.6bn.

The Yahoo board rejected the offer in early February after "careful consideration". Microsoft upped its offer to US$33 but the Yahoo board held out for still more. Thereafter, the companies entered into increasingly public on-off negotiations.

Microsoft and Yahoo have been rivals in search and search-based advertising, but are both overshadowed by Google.

Repeated attempts by both to compete with Google have run aground. Even if they had clubbed together, they still wouldn't have been as big as Google in search. But they would have had a lot more clout.

Google made a brief appearance in early episodes of the drama, mostly to complain that a tie up between Microsoft and Yahoo would "stifle internet innovation" and made rumblings about anti-competitive monopolies.

But as the saga dragged on, and no deal materialised, Google fell silent.

A few weeks after Microsoft's approach, Yahoo was reportedly mulling a new deal with AOL to prevent a takeover from Microsoft. But this came to nothing and Microsoft, ever the patient suitor, maintained that its offer was still sound.

But Yahoo's board wouldn't budge. Frustrated with Yahoo's intransigence, Microsoft appointed a team of 'corporate action specialists' to oust the Yahoo board, but to no avail.

"The intent is well telegraphed," David Mitchell, senior vice president of IT research at Ovum, wrote at the time.

"The idea is to put pressure on the Yahoo board to reconsider its rejection of the Microsoft offer, either through direct pressure on the existing management or through forcing board changes within Yahoo.

That drew a vitriolic rebuff from Yahoo co-founder and chief executive Jerry Yang about Microsoft's bullying tactics.

Yang called Microsoft's bluff. The problem with waging proxy war to replace Yahoo's board, either overtly or through a third party, is that it would have damaged Yahoo as a brand and a company, and triggered a migration of staff and customers, thus lowering the value of what Microsoft was acquiring.

So Microsoft abandoned its pursuit of Yahoo on 8 May and reiterated the statement a week or two later. But, rather strangely, the door to further negotiations remained open.

Over the weekend of 17 and 18 May it emerged that Microsoft was suggesting a deal somewhat short of acquisition.

The details were never revealed - assuming they were ever documented - but it appeared to be a collaboration or joint venture in search and search-based advertising.

While there was clear logic in Microsoft and Yahoo combining forces against Microsoft, there were also gallons of corporate pride sloshing about.

The level of Yang's determination to keep Microsoft at bay was revealed in a court case filed by the Police & Fire Retirement System of the City of Detroit and the General Retirement System of the City of Detroit.

During the case, documents were read to court that detailed how Yang tried to spike any deal with Microsoft with a 'poison pill', chiefly promising generous benefits to key staff who would leave in the event of a takeover.

By that stage, Yahoo's share price had sunk to US$26, well below Microsoft's original offer.

It looked as if the drama was drawing to close, but sometime in early May 2008, after the deal with Microsoft ran aground and Yahoo's share price dropped to $25, shareholder activist and billionaire investor Carl Icahn acquired 50 million Yahoo shares with options on a further 49 million.

Icahn began lobbying for Yang and the Yahoo board to quit and for other shareholders to embrace the deal with Microsoft.

At first he attempted to rally shareholders to mount a management takeover of Yahoo. But the Yahoo board rebuffed this, saying they had the support of the majority of shareholders.

By 23 May, Icahn had assembled a team of corporate raiders, including oil tycoon T Boone Pickens, who were ready to pounce. Yahoo delayed its scheduled board meeting from 3 July to later in the month to fight Icahn's gang.

On 9 June Icahn reckoned he could sell Yahoo to Microsoft for just shy of US$50bn or US$33 a share.

But the momentum seems to have gone out of Icahn's campaign and, in the most recent episodes, his part has been reduced largely to fulminating from the sidelines.

What Icahn's next scene will be is anybody's guess. Analysts have been divided over their opinions on the deal. Some have seen Yahoo's only hope of remaining a player in the internet market and successfully competing with Google is to allow the acquisition by Microsoft to go ahead.

George Colony at Forrester Research said that Microsoft would suffer if it bought Yahoo and, when the deal fell through, congratulated Microsoft on "dodging the Yahoo bullet".

"Yahoo plus Microsoft would have been a disaster," he wrote.

So what will happen next? In the short-term, while there may be more posturing from the principal players, unless there is a major change, the future for Yahoo and its shareholders looks bleak.

Honestly, does anyone think Yahoo's share price is ever going to recover to the US$33 Microsoft once offered? The shareholders should have taken the offer while they could.

The chances are that Yahoo will carry on, trying to protect its position and dribbling away market share. Microsoft will resuscitate an acquisition deal only if Icahn is successful in replacing the board, which looks increasingly unlikely.

Google will sit on the sidelines and continue to benefit, whether Yahoo gets closer to it or not.

The refusal of Yahoo's board to swallow its pride, and the greed of Yahoo's shareholders, has condemned the company to a slow and ugly decline.
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