the mind-boggling merger of microsoft, news corp and yahoo

Posted on April 9, 2008

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You have got to give Steve Ballmer props for the chutzpah to think big and be aggressive.

So Yahoo turned down Microsoft’s takeover offer.

No problem, Ballmer is cutting off Yahoo’s options by reaching out to one of its potential white knights, New Corporation, instead.

Word has leaked that Microsoft is talking to News Corp to hammer out a plan to jointly take over Yahoo.

Now, that is a brilliant move by Ballmer.

While the talks between Microsoft and News Corp are still at a “sensitive stage” according to the New York Times, think of the scale of that tie-up if it does come to pass.

Microsoft’s MSN network, together with News Corp’s MySpace, and Yahoo’s search engine. It could be a strong company that would be a worthy competitor to Google, the undisputed cyberspace king.

News Corp had been keen to talk to Yahoo as a potential savior and help it fight Microsoft’s absorption. But after some early enthusiasm, News Corp had decided that it cannot fight Microsoft’s war chest. If it comes to an agreement with Microsoft to team up to buy Yahoo, Yahoo would have one less white knight it could turn to for help to escape Microsoft’s grasp.

A Microsoft-News Corp partnership also potentially means a higher bid, something that Yahoo had insisted was its bug bear with Microsoft’s $44.6 billion offer. If the amount was raised, Yahoo’s management will find themselves hard-pressed to resist and unable to answer to shareholders if it once again spurned the boys in Seattle.

No one else would even dare to counter offer, or be mad enough to go into a bidding war against the Microsoft and News Corp giants. Which means Yahoo will have to be a reluctant bride.

But Yahoo is fighting back. It has just announced a temporary advertising tie-up with Google. Under the deal, Google will be place ads alongside search results on Yahoo’s website. The pilot would find out if Yahoo could get more ad revenue if it outsourced its advertising to Google.

The two-week trial, Yahoo said, does not mean that it would lead to a partnership with Google. Analysts agree that there are very slim chances for a Yahoo-Google tie-up due to anti-trust issues, but it would be a good opportunity for Yahoo to prove that Microsoft’s unsolicited bid is undervaluing the company.

“We do not think a broader or longer-term Yahoo/Google search partnership would pass regulatory muster,” reckons a Standard & Poor’s note to clients, obtained by the Financial Times. “Nonetheless, we believe such a deal suggests that Yahoo is less likely to accept Microsoft’s current offer.”

Yahoo still has about three weeks left to accept Microsoft’s original offer before Microsoft gets tougher, but has refused to negotiate unless Microsoft sweetens its deal. It might be sweating a little more, now that News Corp seems to have gone over to the enemy’s side.

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