Two weeks after Microsoft Corp. withdrew its $47.5-billion takeover bid for Yahoo Inc., the two companies are back at the bargaining table.
This time they're discussing a partnership that would fall short of an outright acquisition, Microsoft said Sunday. Neither company would say what kind of arrangement they were discussing, but a person familiar with the effort said it involved advertising tied to Web search results.
Microsoft said in a statement that it hadn't made a new offer to buy Yahoo since withdrawing its bid May 3. But for the first time since those talks broke down, the Redmond, Wash.-based software colossus said it "reserves the right to reconsider that alternative depending on future developments and discussions that may take place."
Previously, Microsoft's mantra had been that it had "moved on," and Yahoo executives, who had rejected several buyout offers from Microsoft, didn't seem especially upset that negotiations had collapsed.
Icahn and Google
The dynamics changed late last week as Yahoo's directors grappled with a looming proxy fight with billionaire investor Carl Icahn to keep their board seats. Microsoft, meanwhile, is worried about a deal involving search advertising that Sunnyvale, Calif.-based Yahoo is discussing with Google Inc.
In a response to Microsoft on Sunday, Yahoo said in a statement that it would "continue to consider a number of value-maximizing strategic alternatives" and that it remained "open to pursuing any transaction which is in the best interest of our stockholders."
The signs of thawing in the chilly relations were welcomed by Yahoo investors, some of whom have castigated the board for failing to reach a deal to sell the company. Microsoft on Feb. 1 made a public bid of $31 a share in cash and stock, which at the time marked a 62% premium over Yahoo's stock price, and later raised its offer to $33 before walking away. Yahoo was asking for $37, down from $40.
"Yahoo might be playing this perfectly, rather than the conventional wisdom that they've been playing this horribly," said one major Yahoo investor who requested anonymity because his discussions with Yahoo have been confidential.
A person briefed on the matter said Sunday that the renewed talks began after activist investor Icahn joined the fray. He bought 59 million Yahoo shares and nominated a slate of directors who he indicated would try to sell the company if they were elected at Yahoo's annual meeting July 3. Icahn hasn't yet held talks with Microsoft, the person said on the condition he not be named.
The nature of the potential Microsoft-Yahoo transaction wasn't identified. Senior executives in MSN, Microsoft's floundering online division, last year discussed a range of alternatives that included an MSN-Yahoo joint venture, according to people who spoke with those executives.
They also debated the idea of selling MSN to Yahoo in exchange for a stake in the company, a transaction similar to that discussed in recent weeks between Yahoo and Time Warner Inc.
That potential deal involved Time Warner's AOL division.
Two people who speak regularly with those involved in the negotiations said Sunday that Microsoft might be seeking the right to deliver advertising alongside Yahoo's search results. They insisted on not being named in order to remain apprised of developments.
Microsoft's major goal in pursuing Yahoo has been to expand its online advertising presence, and a search-related alliance would satisfy at least part of that objective.
"This looks to me like a reaction by Microsoft to try to stave off a Google deal as much as it is a reaction by Yahoo to Icahn," said one investor in all three companies.
Searching for solutions
Yahoo has been trying to strike a similar deal that would let Google, based in Mountain View, Calif., deliver ads with some of Yahoo's search results. Some analysts believe a Google deal could produce $1 billion in annual profit for Yahoo, although in doing so it would essentially be giving up on what had been a key competitive front: Web search.
That proposed deal is designed to show Yahoo investors that the company can make dramatic improvements to its operations without help from Microsoft.
The prospect of such an alliance has greatly alarmed Microsoft. It has complained that a deal between search leader Google and No. 2 player Yahoo would run afoul of antitrust laws and could make any Microsoft acquisition of Yahoo impossible. Icahn last week warned Yahoo's board not to make any major deals without shareholder approval.
Next week, Microsoft is hosting an annual conference for major advertisers, at which executives are expected to announce shifts in its ad strategy and improvements in its search service, which is a distant No. 3.
Kevin Johnson, who oversees Microsoft's online business, told employees about the new Yahoo talks in an e-mail Sunday.
He said that although Microsoft was making strides, it remained further behind competitors than it had thought it would be by now.
Johnson wrote that Microsoft intended to "expand strategic partnerships that . . . enable new paradigms in search."