Why Microsoft may help finance Yahoo sale – USA TODAY

7 months ago Comments Off on Why Microsoft may help finance Yahoo sale – USA TODAY

SAN FRANCISCO — Why would Microsoft help finance the sale of Yahoo’s core assets? In a word, search.

Microsoft needs to protect a current partnership with Yahoo to fend off Google from absorbing an even bigger share of the market for Internet searches, say analysts. It’s a situation that reflects the shifting fortunes of two generations of Internet companies, and the alliances inked to fight fast-growing rivals.

“Offering to help with financing is a smart move for Microsoft, because they must protect their investment,” says Colin Gillis of BGC Partners.

Under a 2010 deal, Microsoft serves up results and ads for 51% of Yahoo searches.  “If (Microsoft) is not part of the consortium (that buys Yahoo), that’s a major loss for them,” Gillis said.

Yahoo is seeking $10 billion for its core assets, according to a Re/code report that first noted Microsoft’s potential financial role, as it bows to shareholder pressure to raise capital.

Peggy Johnson, head of Microsoft’s partnerships and acquisitions strategy, is said to be playing an integral role in talks with private equity firms eyeing purchases of Yahoo assets, the report said.

If Microsoft is willing to offer up $3 billion, then private equity firms only have to come up with $7 billion for assets that would include Yahoo Mail, Sports and Tumblr. “That’s an attractive offer,” said Gillis.

Yahoo and Microsoft declined to comment.

Yahoo’s board has been pushed by activist investors to sell its core assets after it abandoned plans for a tax-free spinoff of its stake in Chinese e-commerce company Alibaba. The board and CEO Marissa Mayer said they will consider offers. And that’s put the Microsoft-Yahoo ad deal in a more vulnerable position, analysts say.

“(Microsoft’s search engine) Bing has started to produce profits for Microsoft so therefore they want to keep it alive and keep it growing,” said Andrew Frank, analyst with tech research firm Gartner. “They see Bing as an important counterbalance to Google, whom they consider a rival, and Yahoo’s continued supply of audience is an important component of Bing’s survival.”

Both Yahoo and Microsoft were once heavyweights in search. But the advent of Google’s search engine upended the earlier pecking order.

Internet search ad revenues will hit $86 billion this year, up 30% from 2014, research firm eMarketer estimates. Google is No. 1 in Internet search ad revenues, with more than half of total market share. Its search-derived sales are expected to grow, up 8% to $47 billion this year.

Microsoft’s share of the worldwide market is expected to increase 18.6% to $2.94 billion this year, or about 3.4% overall, eMarketer says.

Meanwhile, Yahoo’s share is expected to decline to 1.6% of the market, to $1.41 billion.

Also worrisome for Microsoft would be any scenario that sees Yahoo’s existing, if shrinking, Web footprint suddenly vanishing. Says SunTrust Robinson Humphreys Internet equity analyst Robert Peck: “A collapsed Yahoo would make Google even stronger.”

The last time Microsoft was involved in a financial deal for Yahoo, the numbers were a lot larger. In 2008, Yahoo founder Jerry Yang rebuffed a $45 billion offer from Microsoft. Under the Yahoo-Microsoft search alliance forged six years ago, Yahoo under then-CEO Carol Bartz volunteered its search technology for listings and ads from Microsoft’s Bing, with Yahoo getting a slice of ad sales.

But recent negotiations have brought Google into the mix, as well.

When the deal came up for renewal in April 2015, Yahoo – now under Mayer – said it needed the flexibility to deliver 49% of its desktop search queries however it wished. Microsoft would provide listings and ads for the remaining 51%. Yahoo would retain control over mobile searches, as it did under the original agreement.

In October 2015, Mayer renegotiated the terms of the deal, bringing Google into the picture. Yahoo said it would partner with Alphabet-owned search giant to provide listings and ads for some of the 49% of desktop search queries where it doesn’t use Microsoft. Yahoo may also use Google for mobile.

New York-based hedge fund Starboard, which holds a 1.7% stake in Yahoo and has been aggressively pushing for a sale,  announced last week an effort to oust Yahoo’s board of directors — including Mayer — in a potential proxy battle at the Internet company’s annual shareholders meeting later this year.

Among companies said to be interested in Yahoo are Verizon, AT&T, Comcast and Alibaba. Thanks to Yang’s foresight, Yahoo has a $30 billion stake in Alibaba, which has been critical to keeping Yahoo afloat in recent years.

Yahoo (YHOO) shares were up Monday 0.8% to $35.14.

Follow Marco della Cava, Mike Snider and Jon Swartz on Twitter.

Why Microsoft may help finance Yahoo sale – USA TODAY}

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