Microhoo revisited: Would it be a search-only deal?

The key factor isn't who occupies the CEO's office. But with Jerry Yang set to step down, a source says, "Microsoft is open to a mutually beneficial search deal."

Updated at 9:47 a.m. PST, with details about the likelihood of any potential Yahoo overture to Microsoft.

If Yahoo wants to get Microsoft back to the negotiating table, it would do well to try the lure of a search-only deal--regardless of whether Jerry Yang is CEO.

That's the assessment from one influential Microsoft source.

"If Jerry was still CEO and called Steve tomorrow and said, let's talk about a search-only deal, I think Steve would listen," said the source. "Microsoft is open to a mutually beneficial search deal. But people are still lusting after a Yahoo (buyout) and no one is thinking about that in Redmond. There's been no discussion of it for months and months."

Apparently, the "lust" is still alive. In early morning trading Tuesday, as the stock market opened in the wake of the news that Jerry Yang will be stepping down as CEO , Yahoo's shares soared nearly 12 percent to $11.90 a share. Meanwhile, analysts churned out research notes speculating that Microsoft may come back with an offer to buy the entire company.

Yahoo stock chart
Yahoo's shares leaped early Tuesday on news that Jerry Yang would be stepping down as CEO. Yahoo Finance

Analyst Benjamin Schachter at UBS noted in a report:

We still believe Microsoft will eventually own Yahoo. Jerry moving out of the CEO role may accelerate this. Yahoo is a key strategic asset in the online space and given the scarcity of key players of size, we see value here not reflected in the stock's current valuation.

UBS has a price target of $18 a share for Yahoo.

Analyst Jeffrey Lindsay of Sanford C. Bernstein said in his research note that Yang's resignation is a good sign, because it demonstrates Yahoo's board is frustrated with the company's performance and management. He further notes:

It is a signal they are prepared to examine more deal options, in particular with Microsoft.

Back in May, Microsoft walked away from the negotiating table after sweetening its initial unsolicited buyout bid for the entire company from $31 a share to $33 a share. But when Yahoo countered with a proposal of $37 a share, Microsoft ended its buyout talks for the entire company.

Yahoo's stock had closed at $19.18 a share on the day before Microsoft announced its $31 a share buyout offer .

The source noted that Yahoo and its investors should bury the notion of a full-up, or entire buyout, of all of Yahoo. If Yahoo were to come to the Redmond giant with a search-only buyout or a search-only partnership, however, that would get its attention--whether it's delivered by Yang or not.

And the source added that any expectation on Yahoo's part to reclaim the approximately $8 billion to $10 billion Microsoft had offered back in late May under its previous search-only, or "hybrid," deal would be a faulty assumption.

Yahoo's shares were trading in the $27 a share range when Microsoft submitted its search-only proposal. Yahoo's shares closed Monday at $10.63 a share.

"Microsoft would not be willing to buy Yahoo's search business at the price offered back in May," said the source.

Should Yahoo take the initiative and approach Microsoft with a search-only partnership, joint-venture, or proposal to sell just its search business, the source offered up one piece of advice to make the process smooth.

"Consistently, Yahoo's board didn't believe Steve. A hundred percent of everything he said in public was what he thought," said the source. "If people go back and carefully read his public statements, they'll see that what Steve said is what Redmond has been thinking."

Microsoft will likely have to wait awhile for any overtures from the Internet search pioneer, said one source familiar with Yahoo's thinking.

Yahoo is launching a CEO search and, as a result, would want to receive input from the new executive on whether it makes sense to approach Microsoft about a search-only deal or partnership.

As previously reported, the companies have not been in recent contact to date.

See also:
• Yahoo CEO Yang to step down
• Yahoo's ultimate search: A new CEO
• Yang's travails: A Yahoo timeline
• A pity for Yahoo that John McCain didn't win
• Jerry Yang memo to staff about stepping down

 

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