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Analysts back Microsoft's Yahoo bid

Despite moves to partner with AOL and Google, analysts still see Microsoft as the most likely to acquire Yahoo.

By Reuters, 11 Apr 2008 at 10:48

This week Yahoo has surprised many with revelations of possible deals with AOL and Google, but it does not seem to have altered Wall Street's view that Microsoft will eventually win the takeover battle.

Yahoo announced on Wednesday a test to outsource web search advertising to Google. Sources say the test is part of a planned three-way alliance to combine Yahoo with Time Warner's AOL instead of Microsoft.

But hours later, the world's largest software company appeared to trump Yahoo's announcement as the New York Times reported that Rupert Murdoch's News Corp was in talks to join Microsoft's $42.3 billion (£21 billion) bid for the Web pioneer.

"Everyone is just exploring. The best option is to accept the Microsoft deal," said fund manager Mike Binger at Thrivent Financial in Minneapolis, which owns small stakes in Yahoo and Microsoft.

Binger said an AOL-Yahoo merger made no sense. "I just see Yahoo as a mature brand and AOL as a declining brand," he said. As of 31 December, Thrivent owned about 1.5 million Yahoo shares, or 0.11 percent, and about 6.3 million Microsoft shares, or 0.07 per cent, according to regulatory filings.

The Wall Street Journal reported the Yahoo board would meet on Friday but said no big decisions were likely until at least next week. A Yahoo spokeswoman declined to comment.

A source familiar with the board's activities told Reuters that Yahoo directors meet to discuss the Microsoft offer and alternatives to it as many as three times a week.

A separate source familiar with the board's deliberations said any big decisions would likely only happen after the company's quarterly earnings report on 22 April.

Microsoft's cash-and-stock offer now values Yahoo at $29.33 (£14.65) per share, which the web company rejects as too low. But before Wednesday, Yahoo appeared to have run out of alternatives to Microsoft, which threatened last weekend to lower its bid if it was not accepted within three weeks, or April 26.

Yahoo is now nearing a deal with Time Warner to fold AOL, excluding its dial-up internet access business, into a combined company, sources familiar with the talks said on Wednesday.

A deal would value AOL at $10 billion (£5 billion), with Time Warner kicking in some cash in exchange for 20 percent of the combined unit. Yahoo would use the cash and other funds to buy back several-billion dollars in stock at a price near the middle of a range between $30 (£15) to $40 (£20) a share, a source familiar with the plans said on Thursday.

"The structure of the AOL deal is likely to be less appealing to Yahoo shareholders than the straight-forward Microsoft bid," Jefferies & Co analyst Youssef Squali said. "We believe that a 'clean' acquisition of Yahoo by Microsoft is still the most likely scenario."

UBS analyst Heather Bellini agreed that Yahoo management would have a difficult time convincing its shareholders that its alternative deal was worth more than Microsoft's offer.

"Even if shares were repurchased at $35-plus a share, the shares likely would pull back once the buyback is done," Bellini wrote in a report.

A joint Microsoft-News Corp bid could create a more formidable competitor to Google by uniting three of the biggest web site publishers: Yahoo, Microsoft's MSN and News Corp's MySpace social network.