The Wall Street Journal-20080213-Google Loses Enthusiasm for Ad Tie-Up- Lack of a Pact May Hurt Yahoo-s Efforts to Avoid Takeover by Microsoft

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Google Loses Enthusiasm for Ad Tie-Up; Lack of a Pact May Hurt Yahoo's Efforts to Avoid Takeover by Microsoft

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Google Inc.'s enthusiasm has waned in recent days for a potential advertising tie-up that could help Yahoo Inc. try to thwart Microsoft Corp.'s unsolicited takeover offer, people familiar with the matter say.

A prominent Yahoo shareholder also predicted that the company would have a tough time avoiding Microsoft's offer, echoing a view of other large investors that Yahoo's sale to Microsoft is likely, though at a higher price.

Yahoo directors have discussed the idea of a pact with Google, which analysts predict would boost Yahoo's cash flow, as one of the alternatives that could help the Internet company in any effort to avoid a takeover by Microsoft, these people say. Under such an arrangement, Yahoo would outsource at least part of its search-related advertising to Google in return for a majority of the revenue.

One of the people familiar with the matter cautioned against ruling out a Google advertising pact with Yahoo. But it doesn't appear likely because of Google's concerns about the intense regulatory scrutiny it could attract, given Google's and Yahoo's significant shares of the Web-search and online-advertising markets, the people say.

Google's lack of enthusiasm could narrow Yahoo's options and reduce its leverage for extracting a higher price from Microsoft.

A Google spokesman said the company doesn't comment on speculation.

Separately, portfolio manager Bill Miller, in a note to shareholders of Legg Mason Inc.'s Value Trust fund released yesterday, said his team thinks "it will be hard for [Yahoo] to come up with alternatives that deliver more value than [Microsoft] will ultimately be willing to pay." He said Yahoo "is in a tough spot if it wishes to remain independent," though his team thinks Microsoft "will need to enhance its offer if it wants to complete a deal."

Mr. Miller's views are closely watched because of his years of beating stock-market indexes. Legg Mason owns more than 80 million shares of the Sunnyvale, Calif., company, making it Yahoo's second- largest shareholder after Capital Research & Management Co.

Yahoo on Monday refused Microsoft's offer on the grounds that it "substantially undervalues" Yahoo. The cash-and-stock bid is effectively valued at about $41.7 billion, or $28.97 a share, based on Microsoft's price of $28.34 in 4 p.m. composite trading on the Nasdaq Stock Market yesterday.

"Microsoft is a disciplined acquirer, and we believe that our proposal is full and fair," said a spokesman for the Redmond, Wash., company. "We are confident that moving forward promptly to consummate a transaction is in the best interests of all parties." A Yahoo spokesman declined to comment.

Mr. Miller's note suggested that Legg Mason itself estimated the value of Yahoo in the range of $40 a share or more. Other significant Yahoo shareholders also are betting that Microsoft will raise its bid for the company, leading to a sale. One, who declined to be named, said an offer in the range of $35 or $36 per share would be hard to turn down, given the absence of rival bidders and questions about Yahoo management's ability to raise the shares to those levels on its own.

Another significant Yahoo shareholder, who also declined to be named, estimated a 95% likelihood that Microsoft succeeds in acquiring Yahoo. The shareholder predicted that any sale would take place at a higher price, possibly in the range of $36 to $38. This investor said Microsoft could justify paying more partly because the combination would likely yield $1.5 billion or more in cost savings and other benefits annually, above the "at least $1 billion" Microsoft has predicted.

Despite the two companies' public standoff, many observers believe they will begin behind-the-scenes negotiations that will lead to a deal at a higher price. Yahoo shares fell 1%, or 30 cents, to $29.57 in 4 p.m. Nasdaq composite trading yesterday. But they are still above the $28.97 effective value of Microsoft's original bid, suggesting investors are betting that Microsoft will increase its offer.

People familiar with the matter have said that, even if Microsoft sweetens its bid, it would likely fall short of the $40 a share that some in the Yahoo camp have been pressing for.

Both companies have been courting large shareholders. Mr. Miller said in his note that since the offer was announced, he had met with Microsoft Chief Executive Steve Ballmer and spoken with Yahoo CEO Jerry Yang.

Yahoo separately yesterday began notifying roughly 1,000 employees world-wide that their positions were being eliminated, according to a person familiar with the matter. The company, which has about 14,300 staff members, late last month announced the plans to cut the 1,000 positions as part of an effort to focus operations. At the time, it said some of the affected staff would have the opportunity to find other posts at Yahoo in its priority business areas. A Yahoo spokeswoman declined to comment on the specific timing of the layoffs.