Microsoft and Yahoo may be working things out

Microsoft and Yahoo have turned a corner and are finally negotiating in earnest about their possible merger, although a deal is far from imminent, according to media reports.

p>In anonymously sourced stories published online mid afternoon Friday, both The New York Times and The Wall Street Journal reported that talks between the companies have suddenly gathered steam.

It has been three months since Microsoft announced its cash-and-stock bidfor Yahoo, valued then at $44.6 billion but now worth about $42 billion because Microsoft’s stock has lost value.

At the time, Microsoft’s management sounded confident that the acquisition would proceed swiftly, but Yahoo’s board threw back the offer in Microsoft’s face, saying it undervalued the company.

Since then, talks between the companies have reportedly been few and unproductive, as Yahoo sought alternative deals and Microsoft threatened to go hostile or, lately, to walk away.

As Yahoo let lapse Microsoft’s deadline to wrap up negotiations on Saturday, everyone with a stake in the deal has been anxiously awaiting Microsoft’s next move.

As recently as Friday morning, consensus was that Microsoft would announce a hostile takeover strategy, such as launching a proxy fight to replace Yahoo’s directors with its own slate of candidates that shareholders could elect at their next annual meeting.

However, now it appears that the companies have made progress over the so far apparently insurmountable disagreement over price, prompting Microsoft to stay at the negotiating table in the hopes of reaching a friendly deal.

According to The Journal, Microsoft indicated this week it would be willing to raise its bid to as much as $33 per Yahoo share, below the $35-per-share minimum that major shareholders are hoping for.

Microsoft’s offer is currently valued at about $29.30 per share, according to The Times, whose sources said that a $34 per share offer could be a happy medium and get the deal done.

Meanwhile, Yahoo could begin carrying Google ads within a week, as it waits for Microsoft to give up its acquisition bid or attempt a hostile takeover, The Wall Street Journal reported Friday.

An ad agreement with Google would make it more difficult for Microsoft to take over Yahoo, and would provide Yahoo with increased cash flow in either scenario, the Journal said, citing people familiar with the situation.

Yahoo and Google tested their proposed ad system over the last two weeks, which faces government scrutiny over possible anti-competitive practices.

Both companies compete with Microsoft in various areas, and want to keep their rival at bay.

The deal, if it moves forward, could be worth as much as an additional US$1 billion per year for Yahoo under a revenue-sharing arrangement with Google, according to a Citigroup analyst.

Yahoo is looking for alternatives to satisfy shareholders that it should remain independent and fend off Microsoft’s unsolicited bid to buy the Internet company.

An announcement regarding Microsoft’s plan to abandon the acquisition or try to takeover Yahoo is expected soon.

-Steven Schwankert

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