Yahoo says talks with Microsoft are dead

updated 9:40 p.m. ET June 12, 2008

SAN FRANCISCO - Yahoo Inc.’s efforts to revive takeover talks with Microsoft Corp. have reached a dead end, prompting the Internet pioneer to hire online search leader Google Inc. to handle some of its advertising sales.

The news disclosed Thursday caused Yahoo shares to plunge 10 percent as investors abandoned hope that Microsoft would renew a nearly five-month quest to buy the Sunnyvale-based company.

While a stock sell-off is never welcome news for any company, Wall Street’s disenchantment comes at a particularly bad time for Yahoo and its board of directors.

Yahoo is trying to fend off a shareholder mutiny led by activist investor Carl Icahn, who has vowed to replace the company’s board because of the way the directors handled the Microsoft negotiations.

But Icahn has been hoping to engineer a sale to Microsoft, so some shareholders may be reluctant to support his attempted coup unless he can demonstrate his slate of directors has a better turnaround plan than the current board.

Icahn did not return phone calls seeking comment Thursday.

The fate of Yahoo’s board is scheduled to be determined at the company’s Aug. 1 annual meeting.

“If you are a Yahoo shareholder, you just have to be scratching your head right now,” said Standard and Poor’s equity analyst Scott Kessler.

With Microsoft apparently out of the picture, Yahoo is turning to Google to help its chief executive, Jerry Yang, prove he made the right decision last month when he turned down Microsoft’s takeover bid of $47.5 billion, or $33 per share. Yang asked for $37 per share, prompting Microsoft CEO Steve Ballmer to withdraw the oral offer.

If the Google partnership passes what’s likely to be a rigorous review by U.S. antitrust regulators and lawmakers, Yahoo intends to use its rival’s superior search technology to display ads on its own Web site as well as those of its partners’ in the United States and Canada.

Yahoo estimated the arrangement could boost its revenue by as much as $800 million during the first 12 months of the partnership.

The deal shapes up as a major victory for Mountain View-based Google, which didn’t want Yahoo to fall into Microsoft’s clutches.

“I am happy to be helping them to stay independent,” Google co-founder Sergey Brin said in an interview Thursday.

Yahoo’s advertising partnership with Google won’t start until late September at the earliest because the two companies voluntarily agreed to wait at least 3½ months to allow the government to review a deal involving the two leading players in search advertising.

Google already holds about 75 percent of the $11 billion search advertising market in the United States with Yahoo in a distant second at 9 percent, according to the research firm eMarketer Inc.

Microsoft had hoped to use Yahoo as a weapon in its efforts to slow Google’s growth, but they couldn’t agree to terms.

“Clearly, it’s time to move on,” Yang said during a Thursday conference call with analysts.

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Before signing the Google deal, Yahoo made a last-ditch effort to persuade Microsoft to revive its last takeover offer of $47.5 billion.

But after withdrawing that bid last month, Ballmer began to focus his efforts on convincing Yahoo to sell its search operations instead.

Yahoo concluded that its search engine was too important to sell piecemeal.

Without explaining its logic, Microsoft said it believed a deal involving Yahoo’s search engine would have been more valuable to Yahoo than if it had bought the entire company at $33 per share. The Redmond, Wash.-based software maker said it remains open to buying Yahoo’s search operations.

Yahoo’s deal with Google includes an escape hatch should Microsoft or another suitor buy the company. If Yahoo is sold, Google would receive a termination fee of up to $250 million.

That clause could still raise hope that Icahn might be able to renew the Microsoft talks if he can win control of Yahoo’s board.

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