From The Sunday Times November 30, 2008 Microsoft in $20bn Yahoo deal John Waples
SOFTWARE giant Microsoft is in talks to acquire Yahoo’s online search business for $20 billion (£13 billion).
The proposal forms the centrepiece of a complex transaction that would see Microsoft support a new management team to take control of Yahoo. But there is no intention of Microsoft tabling another takeover bid for the web giant, after its aborted $47.5 billion offer this summer.
It is thought that Jonathan Miller, ex-chairman and chief executive of AOL, and Ross Levinsohn, a former president of Fox Interactive Media, have been lined up to lead the new management team. Senior directors at Microsoft and Yahoo are understood to have agreed the broad terms of a deal, but there is no guarantee that it will succeed.
However Yahoo is under intense pressure from its investors after rejecting the offer from Microsoft. This valued each share at $33. Since then Yahoo’s price has tumbled to a low of $9 per share.
In recent weeks it has risen to $11.5 per share partly due to the arrival of billionaire investor Carl Icahn who won a proxy fight to get a seat on the board.
According to a filing with the Securities and Exchange Commission, Icahn has built up a 5.5% stake in the company which is now capitalised at $16 billion.
Analysts say it is an opportune time for Microsoft and Yahoo to work on a new deal. There is a management vacuum at Yahoo after Jerry Yang, the group’s co-founder, said this month that he will step down as chief executive as soon as the board finds a successor. He opposed the earlier Microsoft deal and an advertising alliance with Google that he championed broke down because of competition fears.
Under the terms of the proposed transaction, Microsoft would provide a $5 billion facility to the Miller and Levinsohn management team. The duo would raise an additional $5 billion from external investors.
This cash would be used to buy convertible preference shares and warrants which would give it a holding in excess of 30% of Yahoo.
The external investors would also have the right to appoint three of Yahoo’s 11 board directors. The talks with Yahoo involve Microsoft obtaining a 10-year operating agreement to manage the search business. It would also receive a two-year call option to buy the search business for $20 billion. That would leave Yahoo to run its own e-mail, messaging, and content services.
It is expected that the operating agreement would boost Yahoo’s income by as much as $2 billion per annum.
While Microsoft and Yahoo remain profitable, they are slipping behind Google on the web. Over half the $40 billion-plus online-advertising market comes from internet-search ads, and analysts estimate Google has about 77% of spending compared with Yahoo’s 18% and Microsoft’s 5%.
The company’s Windows software is the world’s dominant operating system. But in the internet age Microsoft has been losing its edge and arch-rival Google has come to dominate the web.
Microsoft wants to address that. Last May, Microsoft’s former head of online, Kevin Johnson, told his employees: “The fact is we are not where we want to be in this business yet, and we’ve been in this position longer than we’d like.”
Steve Ballmer, Microsoft’s chief executive, has now made two unsuccessful attempts to buy Yahoo.
He has said he is no longer interested in buying the whole company, but has expressed a strong interest in buying the search business.