Microsoft News Tracker

As if all the squabbling over a Yahoo acquisition weren’t enough, today there were rumors that both Microsoft and Yahoo were in urgent talks to acquire AOL from Time Warner:

Time Warner Inc’s (NYSE:TWX) discussions to merge or sell its AOL Internet division with Microsoft Corp (NasdaqGS:MSFT) or Yahoo Inc. NasdaqGS:YHOO) have taken on new urgency ahead of Yahoo’s Aug 1 shareholders meeting, a source familiar with the discussions told Reuters on Tuesday.

The structure of any deal is not immediately clear, though a combination of any of the parties is expected to redraw the landscape for advertising on the Internet.

Sources had said earlier that a deal with Yahoo would likely involve merging AOL with the Web pioneer, with Time Warner taking a minority stake in the combined company. A deal with Microsoft would likely be a sale of AOL, the sources said.

Time Warner and Microsoft declined comment. A representatives of Yahoo was not immediately available.

An AOL purchase would represent traffic acquisition and added display advertising strength for either party which would presumably help keep Carl Icahn off Yahoo’s back or further Steve Ballmer’s “big bet” on the consumer side of the Web. The last time the Yahoo part of this particular rumor cropped up, I observed that

You may recall that Google owns 5% of AOL and handles their search ad business so Yahoo acquiring AOL and running Google ads would create a surprisingly homogeneous “content” and search company although not obviously a wildly profitable one.

and nothing has changed since then except the amazing possibility of a bidding war.

Yesterday, the head lawyers for the protagonists in the Yahoo acquisition soap opera headed off to Washington for testimony before both House and Senate committees, but it turned out to be one of the least exciting episodes so far. Brad Smith (Microsoft’s General Counsel), David Drummond (Google’s Chief Legal Officer), and Michael Callahan (Yahoo’s General Counsel) all delivered predictable prepared testimony as to whether Yahoo’s search advertising deal with Google indicated creeping monopoly or was just an ordinary business transaction that would provide better advertising for both consumers and advertisers.

The biggest excitement was provided by Brad Smith quoting Yahoo CEO Jerry Yang:

Yang "looked us in the eye," Smith said, and told Microsoft executives, "The search market today is basically a bipolar market. On one pole there’s Google, and on the other pole there are Yahoo and Microsoft both competing with Google. If we do this deal with Google, Yahoo will become part of Google’s pole, and Microsoft would not be strong enough in this market to remain a pole of its own."
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Senators quickly bored in on Smith and Callahan, saying that Yang’s "bipolar" comments, if substantiated, were startling.

"This is pretty explosive stuff," said Sen. Herbert Kohl, D-Wis., chairman of the antitrust subcommittee, who reminded the witnesses they were under oath.

Smith said he repeated "exactly what Mr. Yang said." After the June meeting, Smith recalled, Microsoft chief executive, Steve Ballmer, told him "He (Yang) said there’s only going to be one pole in the market. I guess that would be a monopole, wouldn’t it?"

Callahan was pressed to respond by Sen. Arlen Specter, R-Pa., a former prosecutor. At first Callahan said "it would not be appropriate to comment on Mr. Smith’s accuracy." Then he said he could not recall Yang’s comment.

Good punning on Mr. Ballmer’s part, I’d say, but none of the solons called for storming the gates at the Department of Justice on behalf of either Microsoft or Yahoo-Google so this was merely all for PR value.

Since the whole point of the “Friday Offer” from Microsoft and Carl Icahn to Yahoo’s board of directors seemed to be to build support for Icahn’s proxy fight for control of Yahoo, I was surprised that Microsoft and Icahn didn’t have a rapid reaction PR team ready to counter Yahoo’s characterization of the whole episode. Unlike the Yahoo folks, they apparently took the weekend off but got it into gear today.

First, Carl Icahn released a rather strangely written letter to Yahoo shareholders filled with fulminations and occasional uppercase exhortations (e.g. “DON’T BE FOOLED”). The gist, other than that Mr. Icahn is grumpy and is going to the mattresses in the proxy fight, is the Icahn version of the negotiation timeline and details of the deal offered to Yahoo’s board on Friday. Key points:

• Microsoft’s offered a 5 year guarantee of $2.3 billion a year as replacement search revenue to Yahoo “as long as they continued to supply the page views and affiliate traffic they now had.”
• As far as replacement of the entire Yahoo board of directors and upper management, Icahn says “we were willing to discuss keeping a number of the current board members and Jerry Yang as Chief Yahoo!”

The first item is hard to judge without more details, but seems meaningless in view of Yahoo’s currently declining search share. The second item is merely humorous.

Microsoft, by way of contrast, issued a dignified response titled “Microsoft Sets the Record Straight” which is mostly about Microsoft’s version of the negotiation timeline, but also states that “Microsoft’s proposal did not include changes to Yahoo!’s governance.” This discrepancy with the Icahn version leads Henry Blodget to suggest that “it now seems as though Microsoft was either used by Carl Icahn or is throwing Carl Icahn under a bus in an attempt to restart search talks.”

Frankly, at this stage the atmosphere is so poisoned that I don’t expect any kind of deal is possible unless Icahn wins his proxy fight. I will hazard no prediction on that, but have to observe that this whole weekend farce cannot have done Mr. Icahn much good with the Yahoo shareholders who have held on to this point.

Yahoo’s board of directors has rejected a Friday night joint offer (perhaps a more accurate term would be ultimatum) from takeover artist Carl Icahn and Microsoft:

Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company, confirmed today that it has rejected a joint proposal from Microsoft Corporation and Carl Icahn for a complex restructuring of Yahoo! that would include the acquisition of Yahoo!’s search business by Microsoft.

The proposal was made on Friday evening and Yahoo! was given less than 24 hours to accept the proposal, the fundamental terms of which Microsoft and Mr. Icahn made clear they were unwilling to negotiate. After reviewing the proposal with its legal and financial advisers, Yahoo!’s Board of Directors determined that accepting the proposal is not in the best interests of its stockholders.

The salient aspects of the offer are that Microsoft would get Yahoo’s search business at what Yahoo’s board felt was an unfairly low price, and Carl Icahn’s band of pirates would get to take over what remains of Yahoo replacing the board and top management.

Mr. Bostock continued, “After negotiating among themselves without the involvement of Yahoo!, Carl Icahn and Microsoft presented us with a ‘take it or leave it’ proposal under which we would be required to restructure the Company, hand over to Microsoft Yahoo!’s valuable search business and to Carl Icahn the rest of the Company, giving us less than 24 hours to respond. It is ludicrous to think that our Board could accept such a proposal. While this type of erratic and unpredictable behavior is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders.”
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Mr. Bostock concluded, “Microsoft and Mr. Icahn are trying to dismantle the Company and deliver our search business to Microsoft on terms that would be disadvantageous to Yahoo! stockholders. We are prepared to let our stockholders, not Microsoft and Carl Icahn, decide what is in their best interests and we look forward to the upcoming vote.”

I seriously doubt that Microsoft and Icahn expected their offer to be accepted so presumably this was merely PR fodder for Icahn’s proxy battle. However, while it does give some creditability to Microsoft’s statement that they would deal with Icahn if he wins, I suspect the style and terms of this offer will merely increase the suspicion that Icahn and Microsoft are trying to stampede the shareholder sheep into a pen for a real trimming.

Finally, despite it all, the Yahoo board is still willing to discuss the sale of the entire company or just the search business and wants the shareholders to know it:

Yahoo!’s Board points out that a transaction to acquire the whole company would be much more straightforward and involve far less risk than the new proposal or any similar alternative. The Board believes a whole company transaction could be negotiated and executed prior to August 1st. In rejecting the Microsoft/Icahn proposal, Yahoo! not only repeated its offer to sell the entire Company to Microsoft for at least $33 per share, but also offered to negotiate an improved search only transaction. Microsoft rejected both offers.

Update July 14: The WSJ has purported details of the Microsoft-Icahn offer plus that group’s slant on the negotiations.

Dawn Kawamoto reports at CNET on the upcoming Congressional fireworks related to Yahoo’s proposed search ad deal with Google:

Top legal counsel for Yahoo, Google, and Microsoft will address a Congressional hearing Tuesday, as lawmakers examine the Yahoo-Google search advertising agreement and its potential anticompetitive effects on the future of Internet advertising.

The Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights will call Microsoft general counsel Brad Smith, Yahoo general counsel Michael Callahan, and Google chief legal officer David Drummond to testify as witnesses.

Congressional hearings are mostly an opportunity for bloviating politicos to beat their chests and get their names in the Washington Post and NY Times, but it will be modestly interesting to have the parties repeat in public what they are telling the Department of Justice in private.