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After Spurning Microsoft, Yahoo Reaches Out to AOL

By Kim Hart and Frank Ahrens
Washington Post Staff Writers
Tuesday, February 12, 2008

Now that Yahoo has formally rejected Microsoft's unsolicited $44 billion buyout bid, the Internet company has set its sights on its own deal with AOL.

Yahoo reached out to AOL to gauge the Internet pioneer's interest in some sort of deal, according to someone familiar with the situation who spoke on condition of anonymity because the talks are private. Yahoo is contacting a number of possible partners, the source said, and it is unclear whether the company seeks a buyout or partnership with AOL.

The overture is most likely an effort to find an alternative to Microsoft's bid in case the two tech companies engage in a drawn-out takeover battle. Microsoft made its offer Feb. 1 in an attempt to strengthen its online presence.

Yahoo yesterday spurned the bid, saying it "substantially undervalues" the company. The board of directors is "continually evaluating all of its strategic options" and "remains committed to pursuing initiatives that maximize value for all stockholders," the company said in a statement. Yahoo declined to comment on any discussions with AOL.

A deal with AOL, in addition to forging a search-advertising relationship with Google, is considered by many analysts to be Yahoo's best defense against a takeover. Microsoft expressed disappointment at Yahoo's rejection yesterday and said it "reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value inherent in our proposal."

With 137 million online visitors each month and a strong online display-advertising business that places graphical ads on Web sites, Yahoo commands one of the Internet's most recognizable brands. It has lost ground to rival Google in Web searches and the accompanying advertising, one of the fastest-growing segments of online marketing.

Many analysts have said that outsourcing its search-advertising platform to Google could increase Yahoo's cash flow, making the company more expensive for Microsoft to acquire. Access to AOL's ad-supported content portal and online advertising business, called Platform A, could also bolster Yahoo's ad network, analysts said.

Time Warner, AOL's parent company, last week signaled that it is considering spinning off part of AOL. The Dulles campus of AOL has shed employees through layoffs during its transition from being a dial-up service provider to an online advertising firm.

By letting Google handle its search-advertising service and buying AOL's advertising business, Yahoo could be worth as much as $40 a share, a nearly 30 percent premium over Microsoft's original offer of $31 per share, Sanford D. Bernstein analyst Jeffrey Lindsay said in a note to investors yesterday. A deal with Yahoo could also have benefits for AOL as it struggles to compete against much larger competitors.

"AOL's options to find a future buyer would largely disappear if Microsoft were to acquire Yahoo outright" by eliminating two potential suitors, he said.

He added that by acquiring AOL's assets, "Yahoo could achieve cost synergies by consolidating the research and development staffs and combining the sales forces."

Marianne Wolk, an analyst with Susquehanna International Group, said joining forces with Yahoo could be a setback for AOL, which uses Google to place ads on its Web sites.

"If AOL were to switch to Yahoo, it would see a revenue step down" because it would lose access to Google's network of advertisers, she said. "If AOL's looking for a short-term gain, this many not give it to them."

Some analysts say making alliances with other Internet firms may be a negotiating tactic by Yahoo to force a higher offer from Microsoft. An analyst argued that such pacts may not be enough to outweigh Microsoft's offer.

"If you put every single option to work, it still wouldn't amount to the value that Microsoft is offering," said Scott Kessler, an equity analyst at Standard & Poor's. "If you do the math, really there is only one option at this point -- the deal with Microsoft."

Yahoo share rose 67 cents yesterday, to $29.87, a 50 percent increase over its price Feb. 1, when Microsoft made its offer.

Staff writer Peter Whoriskey contributed to this report.

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