IT WAS meant to reshape competition on the internet, but Yahoo chief executive Jerry Yang was last week declaring the "distraction" of a takeover by Microsoft is now over following the collapse of the $45bn deal.
He may have spoken too soon. All
evidence points to the contrary as companies across the online world continue sizing up their options. Yang in particular looks under increased pressure after the three-month-old talks with Microsoft dissolved in a late-hour exchange last weekend. Activist investors are now working "feverishly" to put together a list of new directors to oust the board at Yahoo and revive discussions with the software giant.
The resilience of Yahoo's stock in the days after Microsoft withdrew its mooted offer of $33 per share reflects the market's confidence that Microsoft will take a second bite at the cherry, particularly if Yahoo's board is forced to bow to unhappy investors. Yahoo stock – which had sunk to nearly a five-year low before Microsoft's unsolicited approach on January 31 – did initially tumble before regaining some lost ground to finish Friday's trading at $25.93.
Microsoft sent a clear signal on Thursday that it had no intention of reviving discussions in the short-term, as it released potential proxy board members from their agreements to serve on the board of Yahoo in the event of a hostile takeover by Microsoft.
Despite this, it is widely believed that Microsoft will have to eventually do something as it struggles to break out of the business software market it dominates to find profits in consumer products.
Firms across the technology and media sectors have been discussing partnerships and takeovers as they scramble to capture the rising tide of money moving into online advertising, a market dominated by Google. With mixed results from its forays into various consumer markets, Microsoft is looking at a number of ways to deal with this convergence, including an aggressive strategy in China. Yahoo owns 39% of Alibaba, parent of China's largest e-commerce portal. If a deal with Microsoft had gone through, it would have significantly increased the software giant's presence in the Asia Pacific region.
China now has a greater internet-user base than the US, in terms of numbers if not sheer dollar size. But that day is rapidly approaching, as a new generation of streetwise mobile-phone toting young people in Beijing and dozens of other cities with money to spend, enjoy their newly found freedoms.
Microsoft chief executive Steve Ballmer is well-known for hedging his bets. Smack in the middle of the takeover bid period, he found time to consolidate the software giant's presence in Asia, by extending its alliance with Novell in the Chinese marketplace.
Microsoft's five-year partnership with Novell started in November 2006. Aimed at making its Windows operating system more interoperable with Linux, the firms collect a fee from software systems that mingle open source programs with products, including Vista and Office.
Also, as Microsoft decided whether to try one more time to land Yahoo, it announced a near £150m spend to develop a research and development centre in Beijing to house its growing Chinese operations.
China continues to attract a cluster of IT giants spending billions, and this is not confined to US multinationals like Microsoft, Google and Dell. Britain's own BT recently completed its £100m takeover of Frontline Technologies Corporation, with operations in China and other Asia Pacific commercial centres. Last month Cisco announced a $16bn five-year deal with the Chinese government, as the first multinational to secure agreement with the notoriously resistant and censorious authorities for a "China Strategy Commission."
Meanwhile, analysts are not convinced by the public pledge by Microsoft and Cisco that they intend to ensure their products work closer together to prevent customers from delaying buying decisions.
They point to the two as undisputed leaders in their respective fields of software and network equipment and that, in reality, they continue to directly compete to deliver their version of a unified communications system tying together email, phones and other internetworking tools.
Jan Dawson, an analyst working with Ovum, a technology research firm, said: "The two hold hands while kicking each other under the table. They will both also continue to do their best to create a world where the other isn't needed."
The winner from that negative scenario should be Google. However, the internet search engine market leader is not helping itself by allegedly posting online illegal maps of Chinese territory, breaching state secrecy laws and the so-called "Great Firewall of China."
A senior IT source said: "The country offers massive and unprecedented potential for growth. But the challenge for technology companies is how to better understand that giant marketplace as they bid to win business.
"Expect an acquisitively minded Microsoft to be back knocking at the door, either with Yahoo or another enterprise with strong Chinese connections."
Back in the US, it has been suggested that Microsoft might now consider AOL a more willing target. It accounts for an estimated $1.51bn of the country's online advertising revenue – just 1.5% of the market – compared to Yahoo's $3.62bn and $7.92bn for Google.
AOL has talked with Yahoo about the possibility of taking a stake in its larger internet rival. Yahoo has also tested the feasibility of carrying search advertising from Google in a two-week trial believed to have emboldened its efforts to rebuff Microsoft.
Indeed, Microsoft chief executive Steve Ballmer cited the prospect of closer ties with Google as one of the reasons for deciding not pursue a hostile bid for Yahoo.
"Your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path," Ballmer said in a letter to Yang last weekend.
Some insiders have suggested that talks between Yahoo and Google have already cooled. In any event, a tie-up between the two would face rigorous scrutiny from regulatory authorities as the two are expected to account for more than 80% of every dollar spent on US search advertising this year.
Those who predict Microsoft will revive its pursuit of Yahoo believe Yahoo's own shareholders will lead the way. Some investors have threatened to sue the internet specialist for rejecting Microsoft's offer, which they thought represented best value against the backdrop of Yahoo's recent dull financial performance. Eric Jackson, founder of activist hedge fund Ironfire Capital in Naples, Florida, said he was working "feverishly" to put together a slate of alternative directors that would allow shareholders to oust the current board at Yahoo's annual meeting on July 3. The challenge will be to submit his resolution by the May 15 deadline triggered when Yahoo finally set the date for its AGM on May 5.
"It has been very busy the last few days," Jackson said earlier this week, "but there is nothing I can share with you yet, because there is nothing definitive at the moment." He declined to comment on rumours that some angry Yahoo investors were attempting to recruit proxy board members previously allied with Microsoft.
Jackson owns just 96 of Yahoo's 1.4 billion shares, but has a track record of successfully shaking things up at the California-headquartered internet company. He set up Ironfire in 2007 amidst a shareholder campaign that eventually saw the departure of former Yahoo chief executive Terry Semel earlier this year.
Jackson claims this new push is drawing not only on that informal group, but has also attracted interest from other hedge funds and asset managers.
"I definitely believe we will be able to effect change," he said. "Whether that will be through a proxy vote on a dissident slate remains to be seen."
The full article contains 1327 words and appears in Scotland On Sunday newspaper.
