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Sunnyvale, California-based Yahoo's recently reconstituted board, which includes activist investor Carl Icahn, on Tuesday cleared the way for a fresh round of talks with Time Warner, Financial Times reported.
The troubled internet company has been a takeover target for sometime. In an effort to fight Google Inc. (GOOG | Quote | Chart | News | PowerRating) in the lucrative online advertising market, Microsoft in February made a $31 per share offer to acquire Yahoo. However, Yahoo found the offer too low. Microsoft, though sweetened the offer later to $33 per share, finally withdrew the $47 billion offer, expressing displeasure over Yahoo's reluctance to engage in talks.
Soon after Microsoft proposed an offer to take over the search engine operations of Yahoo, which was also turned down by the company. In the meantime, Yahoo also explored various ad sharing deals with rival Google. Around the same time, Yahoo had also discussed a combination with AOL, but the talks did not proceed much.
Carl Icahn, like many other investors, was irked by yahoo's treatment of Microsoft's offer and he soon began clamoring for a change of guard at the company. Yahoo finally appeased Icahn by offering him a seat on the board.
However, Icahn still seems to believe that eventually Yahoo will need to do a deal with Microsoft. In an interview with CNBC last week, Icahn said Yahoo would eventually have to do something with Microsoft or Google is going to kill it.
Noting Icahn's comments on CNBC, Collins Stewart analyst Sandeep Agrawal said early in the week that Microsoft's is the cheapest large-cap tech stock at 11X'09 EPS. Possibly to reverse this impression, Microsoft on Monday revealed a share repurchase program.
Agrawal notes that Yahoo's fundamentals are deteriorating due to its heavy exposure to the weakening display advertising market, and to some negative trends in search. He also asserts that the prospects for government approval of Yahoo's outsourcing deal with Google are no better than 60%. "Our view is that as it becomes increasingly clear that Yahoo cannot bring the kind of lift to its share price that Microsoft offered, Microsoft and Icahn will likely re-engage in talks with Yahoo for a possible MSFT/YHOO deal," Agrawal writes.
Cowen's Jim Friedland cautioned that Yahoo "faces secular challenges beyond a likely near-term softening of the display ad market." He thinks Microsoft is still interested in Yahoo's search assets. However, he feels a search-only deal or an outright purchase of Yahoo would only occur on reduced terms. If the government strikes down the proposed Yahoo/Google ad deal, Microsoft would quickly return to the table because it could negotiate from a position of strength, he feels.
YHOO is currently trading at $19.01, up $0.08 or 0.42%, on 32,146 shares. For the past year, the stock trended in the range of $17.25-$34.08.
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