Analysis: Yahoo-Microsoft merger back on the table?

Just when it seemed that their stormy relationship had ended, Yahoo and Microsoft may end up reconciling and coming to terms on a merger sooner rather than later.

Comments by both CEO Jerry Yang and President Sue Decker—pressured by a sliding stock price and grumbling shareholders—seem to indicate Yahoo may be willing to return to the bargaining table to make the deal happen while their seats are still warm.

It’s become apparent following what appeared to be the end to a three-month saga—which began when Microsoft offered an unsolicited $44.6 billion bid for Yahoo on Feb. 1—that there was far more than met the eye about Microsoft’s courtship of Yahoo.

As in any relationship, the scenario perceived in public and played out in the press—that of an ardent Microsoft pursuing an unwilling Yahoo—doesn’t tell the whole story.

It seems now that not everyone at Yahoo was keen on spurning Microsoft, and not everyone at Microsoft was all fired up to do the deal. A realization that the two really do need each other may inspire the companies to eventually marry, like an on-again, off-again couple.

Decker, who had been noticeably silent since Microsoft’s initial offer, found her voice Tuesday in an interview published on the Tech Ticker webcast on Yahoo Finance. In the interview, she hinted that Yahoo might still be open to a deal, pointing out that it would be beneficial for both companies.

“When you stack up Microsoft’s assets and Yahoo’s assets, there are certainly some real reasons why the combined company could be really successful,” she said, according to the webcast.

Decker’s comments follow similar ones Yang made on Monday. Yang—who steered Yahoo to avoid acquisition—has been accused of not wanting to give up his baby and blocking the deal for emotional reasons rather than shareholders’ interests.

However, once Yahoo stock tumbled and shareholders expressed ire, he relented in an interview with Bloomberg that he and board members would still be open to selling to Microsoft—or anyone else, for that matter—if the price were right.

Yang also said on Monday, in an interview with the Financial Times, that it was Microsoft, not Yahoo, that walked away from the deal; his company was still willing to negotiate on price, he said.

Decker, too, said price was the deal breaker, yet she defended Yang against allegations that he hasn’t put shareholders first during negotiations with Yahoo.

“Absolutely the sole guiding light in this process was maximizing shareholder value,” she said.

On the other side of the fence, despite his bluster and insistence that a Microsoft-Yahoo combo would “deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers”—in an ultimatum to Yahoo’s board on April 5—even Microsoft CEO Steve Ballmer seemed to lose the thrill of the chase the longer Yahoo held out.

By the waning days of negotiations, according to the New York Times, Ballmer appeared ambivalent to Microsoft’s infatuation with Yahoo.

“Should we just forget it?” he asked aides about the deal, the New York Times reported Tuesday.

Forget it. Microsoft seems to have done that, and several executives—including Microsoft founder and Chairman Bill Gates—have already asserted publicly that the company has moved on and is ready to go it alone to improve its Internet business.

“Microsoft is focused on its independent strategy,” Gates said, speaking in Tokyo on Wednesday.

Still, some believe Microsoft, which has bungled its Internet and online advertising strategy so far, may need Yahoo just as much as Yahoo needs them.

Andrew Brust, chief, new technology at consulting firm Twentysix New York, wrote in a blog posting that Microsoft’s struggling Internet business—and the fallout from problems surrounding its Windows Vista OS—make a deal with Yahoo crucial to the company’s future.

“They need this deal, despite Steve Ballmer’s protestations to the contrary, and despite the prevailing wisdom that the merger would be unsuccessful,” he wrote. “I don’t see a good alternative acquisition. … If Microsoft fails here, and continues to mishandle its damage control around Vista, then the company will be in a bad place. The setback won’t be irreparable, but it will be significant.”

Financial analysts, too, believe a deal may still be imminent. In a research note earlier this week, Piper Jaffray analysts Gene Munster and Vivian Li wrote that there “are still many pieces and players that need to sort out before the dust truly settles.”

“We continue to believe that Microsoft needs help to create a formidable online advertising presence and believe Yahoo still makes the most sense as an acquisition,” the analysts wrote.

A Citibank research note by analyst Mark Mahaney, published Tuesday, also mentioned that a deal between the two companies is a possible scenario for Yahoo’s future.

For that to happen, Microsoft and Yahoo would have to see the error in their ways now that they’ve parted. If fallout from Yahoo shareholders proves too daunting for the company’s board to handle, and Microsoft can’t see another way to quickly revive its Internet business, the potential is there for a Microsoft-Yahoo partnership to blossom again.

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