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Originally published May 19, 2008 at 12:00 AM | Page modified May 19, 2008 at 10:13 AM


Microsoft pushes for ad deal with Yahoo

Microsoft said Sunday it has restarted its pursuit of Yahoo, a move likely to set off yet another round of high-profile negotiations and...

Seattle Times technology reporter

Microsoft said Sunday it has restarted its pursuit of Yahoo, a move likely to set off yet another round of high-profile negotiations and speculation, but this time with a real deadline facing Yahoo directors.

Two weeks after dropping its offer of up to $47.5 billion for the Internet giant in a deal Yahoo's board never warmed to, Microsoft now proposes an unspecified transaction short of a full-blown buyout. Unconfirmed reports say the deal may involve the search business.

The company first began its pursuit of Yahoo in February as a way to quickly narrow the gap with Google in the business of Internet search and online advertising.

While Microsoft said it had moved on from its Yahoo bid, billionaire financier Carl Icahn's actions last week again shifted the playing field. Icahn bought 4.4 percent of Yahoo and announced a slate of candidates to replace board of directors at the company's July 3 stockholder meeting.

In light of those developments, Microsoft said in a statement, the company "is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business.

"Microsoft is considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo."

Microsoft gave no additional details on the nature of the transaction.

Reports citing unnamed sources at Microsoft and Yahoo suggest the transaction could involve the purchase of Yahoo's Internet search business.

In a statement later, Yahoo said it wasn't interested in selling the entire company but was open to any transactions in the best interests of its investors.

People familiar with the matter told The Wall Street Journal the plan would show ads sold by Microsoft that would appear alongside Web search results delivered to Yahoo users.

Yahoo has been exploring the outsourcing of its U.S. search advertising to Google, an arrangement that raised antitrust concerns and was one of the key factors cited by Microsoft Chief Executive Steve Ballmer when he withdrew his offer earlier this month.

Google has continued to widen its already huge lead over both Yahoo and Microsoft in U.S. Internet search. In March, Google had 59.8 percent of the market, according to comScore. Combined, Yahoo and Microsoft would have 31 percent, though both companies' shares are declining.


Google has an even more dominant share in some other markets, such as Europe, where more than 79 percent of March searches were performed using Google. Yahoo and Microsoft had less than 4 percent, combined.

Internet search is important because the majority of online advertising revenue comes through targeted text ads sold next to search results.

Microsoft previously raised the idea of a partnership or purchase focused only on Yahoo's search business. Former Yahoo CEO Terry Semel confirmed two years ago that Microsoft had proposed buying a stake in Yahoo's search operation.

At the time, Semel was widely quoted as saying, "I will not sell a piece of search. It is like selling your right arm while keeping your left. It does not make any sense."

One analyst said things have changed. "It actually could be a clever move," said Jeffrey Lindsay, an analyst at Sanford C. Bernstein. "It could be a face-saving way out for both sides."

Microsoft's move to restart a deal comes as little surprise to observers who saw Ballmer's withdrawal of the bid as a negotiating tactic.

Yahoo's shares did not tumble precipitously in the days and weeks after Microsoft withdrew its bid, indicating the market expected Microsoft to return to the table.

Yahoo shares closed Friday at $27.66, down only 3.5 percent from their level on the day before Microsoft yanked its bid.

Icahn, in a letter to Yahoo Chairman Roy Bostock, said he would not need to continue his effort to replace Yahoo's board with one amenable to a Microsoft takeover if Yahoo moved "expeditiously to negotiate a merger with Microsoft."

While Microsoft said Sunday it is not currently looking to acquire Yahoo outright, the company "reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo or discussions with shareholders of Yahoo or Microsoft or with other third parties."

A person familiar with the matter said Microsoft has not been in contact with Icahn.

Material from Bloomberg News and San Jose Mercury News was included in this report. Benjamin J. Romano: 206-464-2149 or

Copyright © 2008 The Seattle Times Company

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