Rupert Murdoch’s News Corp., which had previously said it won’t be competing with Microsoft for Yahoo (largely because it doesn’t have that kind of cash), now emerges as a potential “white knight” in Yahoo’s struggle to a) avoid the Microsoft deal entirely, or b) have a credible bargaining chip to raise the bid. Silicon Alley Insider and TechCruch have raised the possibility of such a deal and speculate on what its terms might look like.
Silicon Alley Insider suggests how a News Corp. strategic investment and asset swap might turn it into Yahoo’s largest shareholder, which could then resist Microsoft’s offer:
Some kind of swap where News Corp. gives Yahoo MySpace and other Fox Interactive Media properties, perhaps along with a slug of cash from itself or a private-equity firm, in exchange for a major equity stake.
Some rough math: Say News Corp. convinces Yahoo that FIM is worth $6 billion (30x projected operating profit) and cobbles together another $9 billion in cash (some from News Corp, some from a third-party investor such as Quadrangle). At Yahoo’s current market cap–post the Microsoft booster shot–the $15 billion would buy about a third of the company.
Importantly, after such a deal, News Corp, the third-party equity partner(s), Jerry Yang, David Filo, and other Yahoo managers could, between them, own close to half of Yahoo.
Yet this is what News Corp. President Peter Chernin previously said in an earnings call in December about the potential of such a deal with Yahoo:
I think we’ve been pretty clear that we are not interested, we’re not bidding, we’re not looking at it. I’m not sure there’s anything else we can really say at this point…
That was then; this is now. The speculation is that Yahoo would likely still need a Google search deal with the prospect of increased search revenue, notwithstanding a News Corp investment, to fend off Microsoft. But the Wall Street Journal is reporting that Google’s enthusiasm for such a deal has “waned.” Anti-trust realities are likely at the heart of that diminishing interest.
One can imagine that the alleged conversations with News Corp. are real given Yahoo’s strong motivations to avoid becoming a division of Microsoft, if at all possible. Whether they result in any potential, viable deal is quite another matter. Microsoft will likely raise its bid (perhaps to $35 per share vs. the $31 that was originally offered), making it harder for Yahoo’s largest shareholders to resist a very concrete and appealing deal that offers real value to them. (In fact, the first shareholder lawsuit has reportedly emerged seeking to compel serious consideration and/or acceptance of the Microsoft bid.)
However, complicating everything for Microsoft are the layoffs at Yahoo and the atmosphere of “open season” that recruiters and startups now perceive there. One surviving Yahoo employee told me last night in an email, regarding the layoffs and the mood, “It’s [expletive] madness.”
While Yahoo has laid off about 8% of its workforce (and still has over 13,000 employees), more are probably distracted or actively looking for alternatives. That is exacerbated by the fact that some people at Yahoo informally and anecdotally have expressed a negative view of the culture and climate in a post-Microsoft acquisition scenario. It’s very hard for Microsoft to reassure those people and convince them of a brighter future while it’s still actively negotiating for Yahoo, let alone in potential “hostile takeover” mode.