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Yahoo, Weighing Options, Keeps Them Open
Saturday April 12, 2008 8:37 pm ET
By ANDREW ROSS SORKIN and MIGUEL HELFT

Yahoo’s board met Friday to evaluate Microsoft’s takeover bid and other alternatives but did not make a formal decision on which option to pursue, people briefed on the meeting said.

Yahoo’s board did authorize the company’s management to continue meeting with Microsoft and with Time Warner, these people said, and meetings with both are expected to be scheduled for next week.

In addition to Microsoft’s proposal, the board is considering a plan to merge with the AOL unit of Time Warner, these people said. Yahoo has also been discussing a complementary plan to outsource its search advertising business, one of its principal sources of revenue, to Google, in an effort to increase revenue and try to remain independent.

The meeting followed a flurry of activity around Yahoo in recent days. It began last Saturday with a threat by Microsoft’s chief executive, Steven A. Ballmer, to begin a proxy fight to oust the board unless the companies reached a negotiated merger agreement by April 26.

On Monday, Yahoo said that it was not opposed to a deal with Microsoft but reiterated its position that the software giant’s offer undervalued Yahoo. Microsoft’s Jan. 31 offer was initially valued at $44.6 billion, or $31 a share, but after a decline in Microsoft’s shares, it has fallen to about $41.6 billion, or $28.95 a share.

Yahoo has also been discussing a combination with AOL. Under the proposed deal, whose terms remain in flux, Time Warner would merge AOL into Yahoo and provide the company with a cash infusion, according to people briefed on the talks.

The proposal would leave Time Warner with a 20 percent stake in Yahoo and would value AOL at about $10 billion, these people said. The deal would not include AOL’s rapidly declining dial-up business, these people said.

On Wednesday, Yahoo announced a limited test to outsource its search ads to Google. The test is intended to determine whether Yahoo could make more money by letting Google sell its search ads. By Yahoo’s own projections, Google earns on average 60 percent to 70 percent more for every search than Yahoo.

During the week, Microsoft also held talks with Rupert Murdoch’s News Corporation about possibly joining forces in a bid for Yahoo. But a person briefed on the discussions described those conversations as “conceptual,” suggesting that a joint bid was unlikely.

In Silicon Valley and on Wall Street, the conventional wisdom remains that Microsoft will eventually walk away with Yahoo.

“If you want the final chapter, Microsoft buys Yahoo,” said Bob Davis, a venture capitalist and former chief executive of the Internet portal Lycos.

Mr. Davis, a general partner at Highland Capital Partners, said outsourcing search ads would help Yahoo in the short term but devalue the company over time.

“To the extent that Yahoo outsources such a key capability to its principal competitor, it puts itself in a catch-up position for the rest of time,” he said.



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