Yahoo! have reportedly spent the July 4 bank holiday weekend in discussions with its lead adviser, Goldman Sachs, and potential bid partner Time Warner to defend itself from a break-up by Microsoft.The online search engine is seeking to re-enter talks with the cable company about a possible merger with its internet arm, AOL, in a deal that could be worth as much as $10 billion.
Discussions were spurred on by the apparent threat from Microsoft launching a break-up bid of Yahoo!, with the search giant looking to secure some kind of deal before its shareholder meeting on August 1, where they will vote whether or not to re-elect their board.
Yahoo!'s board of directors will be looking to looking to convince enough investors that they acted in their best interest by turning down Microsoft's various offers, especially the most recent which would have seen Microsoft buying Yahoo!'s search business - rather than the search advertising deal Yahoo! entered into with Google.
Based on the slide deck filed to the Securities and Exchange Commission the presentation to its shareholders is likely to be of a defensive nature, systematically detailing Yahoo!'s arguments for why Microsoft's offer would have been bad for shareholders.
Yahoo!'s strongest argument is that separating display and search advertising makes little sense strategically in a world where those two forms of advertising are colliding. The Microsoft deal would have required that Yahoo! give up its search advertising business and prevented it from re-entering that market in the future.
The presentation also deals with claims and propositions by one of its largest shareholders, Carl Icahn, who has already nominated himself and other executives to replace the current board, pointing out that the companies he has become actively involved in trying to change, Blockbuster, Motorola and, somewhat ironically, Time Warner, have underperformed in recent times.
Mr Icahn is particularly dissatisfied with Yahoo's rejection of the $48 billion cash and shares offer Microsoft made in May.
Microsoft is looking to take over Yahoo!'s search businesses so that it can compete more aggressively with search giant Google and gain a bigger foothold in the online advertising market, estimated to currently be worth $40bn and set to double by 2010. Insiders at Yahoo! insist that an offer which sought to break up the company would not work because of the difficulty in valuing its non-search business.
The Yahoo!-AOL merger would certainly have its benefits to both parties - Citygroup Global Markets recently released a report maintaining that a proposed merger would allow Yahoo! to stay independent, gain display scale and keep search options open, whereas Time Warner would gain internet scale through a passive stake in a larger entity. Moreover, a merger could lead to massive cost savings synergies, reportedly as much as $900 million.
In any case, it is likely that the upcoming shareholders meeting will be watched particularly closely by Microsoft, analysts and shareholders alike.
