Microsoft said on Sunday that it had approached Yahoo, this time with an ostensibly narrower aim: a collaboration on Internet advertising. But it hinted that it could still seek a takeover down the road.
The renewed talks reflect both Microsoft’s fears and Yahoo’s potential ills. Microsoft wants to head off any collaboration on advertising between Yahoo and the market leader, Google. At the same time, Microsoft is seeking to capitalize on the perceived weakness of Yahoo, which is facing a proxy battle with the activist investor over the failed takeover talks.
Mr. Icahn, who has made a career out of agitating for change at some of the nation’s largest companies, bought a stake in Yahoo after the Microsoft takeover negotiations collapsed. He has named a slate of directors and threatened to unseat Yahoo’s management — or at least push Yahoo back into Microsoft’s arms.
Microsoft released a brief statement on Sunday disclosing the renewed talks, a surprising reversal just weeks after it withdrew its $47.5 billion bid for Yahoo and said it had “moved on.”
In an e-mail message to Microsoft employees on Sunday afternoon, a senior Microsoft executive seemed to acknowledge that moving on might be difficult.
In his memo, Kevin Johnson, the executive in charge of Microsoft’s Internet business, emphasized the urgency felt at Microsoft about its failure to make more progress in catching up to Google.
“Regardless of the outcome of any new discussions,” he wrote, “it is important that we continue to move forward to strengthen our online services business. The fact is that we are not where we want to be in this business yet and we’ve been in this position longer than we’d all like.”
Mr. Johnson then outlined Microsoft’s ambitious agenda in Internet search and online advertising, exploiting the company’s strengths in desktop software and newer fields like cellphone software. Among the goals enumerated in the memo are to “innovate and disrupt in search,” “win in display” ads online and “reinvent portal and social media experiences.”
Microsoft’s hastily revived effort to reach some kind of deal with Yahoo seems to suggest that the software giant has doubts about whether it can achieve those goals on its own.
Indeed, Microsoft’s on-again, off-again interest in Yahoo has raised questions from analysts, investors, customers and employees about its strategy. Amid the discussions, Microsoft is scheduled to present its online strategy to advertisers at a gathering this week.
People involved in the confidential discussions between Microsoft and Yahoo said the talks centered on a partnership or joint venture for search-related advertising to compete against Google. When Microsoft first made its unsolicited bid of $31 a share for Yahoo in February, it said it was doing so as part of its battle to increase its relatively small slice of the search-related advertising market against Google, a giant with about 60 percent of the United States market, according to the measurement firm .
By comparison, Yahoo has about 21 percent of the market, and Microsoft has about 9 percent, comScore said.
The timing of Microsoft’s new approach may be a turning point in the months-long story or just an opportunistic effort to further insert itself into a dance between Yahoo and Google. Yahoo has been racing to complete its own partnership with Google and was expected to announce a formal agreement as early as this week. A Yahoo-Google partnership, which would likely face antitrust scrutiny, could make Yahoo a less desirable partner or takeover candidate for Microsoft.
The Google-Yahoo discussions have been centered around the notion of Google delivering ads alongside some Yahoo searches. Such a deal would help Yahoo generate more cash, because Google’s search advertising technology is more sophisticated and is used by more advertisers. As a result, Google earns more on every search than its competitors, on average.
A similar partnership between Yahoo and Microsoft might not have the same effect, because Microsoft’s base of advertisers is smaller than Yahoo’s. People involved in the confidential discussions said that search advertising was certainly a part of Microsoft’s renewed interest in Yahoo, but they cautioned that any relationship being discussed might be different from the one the company had been contemplating with Google.
A Google representative did not return a phone call seeking comment.
It is unclear whether Microsoft would pursue a takeover bid again. In its statement on Sunday, Microsoft insisted it was not making such a bid, but hinted that it could be persuaded to reverse course.
“Microsoft is not proposing to make a new bid to acquire all of Yahoo at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo or discussions with shareholders of Yahoo or Microsoft or with other third parties,” the company said.
The new discussions also come as Yahoo is facing increasing pressure from shareholders, some of whom are furious that its board did not work harder to reach a deal to sell the company to Microsoft. Last week, Mr. Icahn said the directors had “acted irrationally and lost the faith of shareholders.” People close to Microsoft and Mr. Icahn say that neither has been in contact with the other.
Yahoo released a statement late on Sunday saying that it continues to explore strategic alternatives and remains open to any proposals that are good for its shareholders.
“Yahoo’s board of directors will evaluate each of our alternatives, including any Microsoft proposal, consistent with its fiduciary duties, with a focus on maximizing stockholder value,” the statement said. Yahoo also said that it had confirmed with Microsoft that the software giant was not interested an outright acquisition of Yahoo at this time.
Shares of Yahoo closed last week at $27.66, far above the $19 a share they traded at before Microsoft’s first bid, in anticipation that a deal of some sort will be reached. Shares of Microsoft closed Friday at $29.99, roughly half their peak price in December 1999.
