Microhoo: The Game Continues to Change

As reported by the WSJ, Microsoft (MSFT) and Yahoo! (YHOO) are apparently talking again. In the statement provided by Microsoft, the company highlighted that it is "considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo." This is certainly a change of approach from the recent "take it or we will go hostile" strategy. Interesting indeed.

For Yahoo! this new discussion makes sense, given that it would allow Yang and the Board to potentially save face and give Yahoo! the strategic partnership it needs, while also maintaining control of their company (depending on the stake). For Microsoft, the motivations are less clear. In the short-term it does show that once again they are willing to negotiate, moving further away from the hostile disposition that did not go over well with some investors.

As for strategy, it would make Yahoo! pull back on its talks with Google (GOOG), at least in the short-term, as the potential partnership/merger between Microsoft and Yahoo! progresses. A partnership with Google was always an unwritten poison pill for Microsoft, and Yahoo! had certainly been playing its card. Whether Google wanted to partner or not really did not matter. It served both of their needs as it continued to distract each company while helping Yahoo! fend off a hostile takeover. If a deal with Google has fallen through - which some suspected after the Microsoft merger talks fell through - then it would also allow Yahoo! to save face, once again.

Still, on first read it is difficult to tell whether a merger or partnership would be better for Microsoft. A partnership would allow both companies to remain intact (for the most part), maintaining the two diverse corporate cultures. It may also prevent talent at both companies from bolting out the door, or Googling for jobs at, well, Google. Of course, without a merger Microsoft would certainly have less input on Yahoo! search and advertising, making integration slightly more difficult. Interestingly, the WSJ article also stated that the deal "... would involve Yahoo carrying search advertisements from Microsoft." This seems hard to believe considering how Yahoo! was testing and considering farming out aspects of its advertising to Google. This alone makes me think we have not heard, or are not being told, the whole story.

How this will play out for each stock remains to be seen. It really depends on the type and size of the deal, as well as how much control Yahoo! retains. Whether Icahn and numerous other investors and speculators will get paid is also yet to be seen. Any formal predictions on a final outcome? Not from me. At this point it seems foolish to predict that we might be near the end game when the game keeps changing.

Disclosure: None