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The Return of the Microsoft/Yahoo Acquisition Rumor Mill

Rumors that Microsoft has met with private equity investors interested in acquiring Yahoo and is weighing the possibility of offering significant financing to help them succeed in their efforts has many tech watchers feeling a sense of déjà vu. No evidence has surfaced that Microsoft actually wants to take a second shot at acquiring Yahoo itself but the whispers that surfaced late last week, suggest it may be a major player in the uncertain future brings back memories of the two companies' storied past.

If Microsoft plays a key role in an acquisition of Yahoo's core assets, even indirectly, it certainly doesn't mean former CEO Steve Ballmer was right all along back in 2008 when he unsuccessfully tried to wage a $45 billion gamble on the struggling company. At the time, many observers and Microsoft insiders feared the huge financial bet was a disaster in the making. The fact that Yahoo founder Jerry Yang and his board were foolish enough to turn down the premium offer is mind boggling, considering it was evident even back then the company was unlikely to see an offer -- or achieve organic value -- that would have benefited shareholders even close to what Microsoft put on the table back then. The soap opera that has defined Yahoo ever since speaks for itself. Yet Yahoo's pain over that time became Microsoft's gain on many fronts, though to be sure, Redmond had many rough years as well.

After the deal failed, Microsoft ultimately negotiated a 10-year search deal with Yahoo, making Bing its default search engine. That gave Microsoft much of what it wanted at the time with far less of an upfront investment. The pact had incremental benefits for both companies but when Marissa Mayer took over as CEO in 2012, the former Google exec felt differently. Mayer was unhappy with the arrangement and managed to convince Microsoft to scale it back, allowing Yahoo to take another stab at developing its own online search engine.

Back in early February 2008 when Microsoft made the stunning and unexpected hostile takeover bid for Yahoo, we were just wrapping up the March issue of Redmond magazine. The implications were so significant that we ripped up the issue so we could adequately cover it. Looking back at our cover story (Can MicroHoo Take On Google?), which raised serious questions whether it was a wise move or if it would even go through, the deal had promised to help Microsoft take on Google in search and in shifting its then Windows Live ambitions to a Web services portal model that would reach more users. Acquiring Yahoo even offered a hedge against what is now Google Apps for Work, which Microsoft saw as a threat to its Office franchise. It also potentially offered Microsoft a way to transition into the open source world, we reported. Microsoft was yet to announce it was planning to roll out what is now Azure and no one knew to what extent people would embrace the new Apple iPhone -- or any smartphone.

As reported today on CNBC, any moves by Microsoft to have a place in taking a piece of Yahoo are in the early stages. It may gain traction or someone else may make Yahoo an offer it can't refuse. Still, the current auction for Yahoo's assets includes its core businesses outside of its stake in Alibaba. That puts the cost in the range of $10 billion if Yahoo has its way -- though the assets are valued at much less. That's far less risk than the $45 billion of eight years ago. But why would Microsoft want a piece, or influence, over the future of Yahoo?

Mayer's efforts to turn Yahoo around has failed on a number of fronts, including its her decision to pull away from Microsoft, which still has plenty to lose if someone were to pit those assets against Bing. As spelled out in a Seeking Alpha post by Mark Hibben, "Yahoo's recent earnings report for 2015 Q4 and the full year reveals how badly the strategy to circumvent Microsoft backfired." While last year's revenues rose a modest 7.5% to $5 billion, he noted traffic acquisition costs mushroomed from $217.5 million in 2014 to $877.5 million 2015.

"The path to restoring profitability is fairly straightforward: dump Mayer," Hibben added. "Dump the attempts to develop an independent search capability. Return to using Microsoft Bing. Integrate future mobile and contextual search efforts within the larger Microsoft cloud services strategy. Rarely in the acquisition of troubled companies such as Yahoo is an opportunity presented such as what currently faces Microsoft. Microsoft can be the salvation of Yahoo. Indeed, it's the only company that can. Any other acquirer just gets an empty shell when it comes to search. Microsoft would get an empty shell as well, but it's a shell it can profitably fill."

As reported by Re/code's Kara Swisher last Thursday, among other "strategic bidders" besides Microsoft are AT&T, Comcast and Verizon. The latter last year already acquired AOL.

Yahoo is on the auction block thanks to the aggressive efforts of activist investor Starboard Value which issued a proxy battle looking to replace the company's entire board, including Mayer. If the private equity firms looking at Yahoo's assets, which according to Swisher (citing numerous sources) include Advent International, Vista Equity Partners, TPG, KKR and others, get Microsoft to fund the deal, it would apparently be an unconventional way for Microsoft to ensure it kept its interest in making sure Bing remains core to Yahoo's future.

As reported by Mary Jo Foley, while Bing may still only have a small piece of the search pie dominated by Google, it is still an important asset to Microsoft. Its core components power Windows 10's Cortana and it is the basis of a graph "to make more useful the interactions between its own products, like Xbox, Office, Windows and its various cloud services."

Microsoft, along with Amazon, IBM, HPE, Google and many others, see machine learning and artificial intelligence (AI) as a huge opportunity. That could explain why Microsoft is at the very least exploring how it can keep Yahoo within its reach. Even if that happens, and that remains to be seen, it wouldn't be a bet-the-company move this time.

Posted by Jeffrey Schwartz on 03/28/2016 at 1:29 PM


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