Yahoo Investor Pens Public Plea for Microsoft Search Deal

One of Yahoo’s largest shareholders is urging the beleaguered Internet company’s board to sell its search assets to Microsoft.

Ivory Investment Management, a Los Angeles-based hedge fund, on Wednesday submitted a letter to Yahoo’s board proposing a deal whereby Yahoo would sell its search assets to Microsoft for about US$15 billion, or $25 per share.

That’s almost double the value of Yahoo’s stock, which was up 7.63 percent at $13.14 per share in mid-day trading.

Under Ivory’s proposed deal, Yahoo would retain 80 percent of the revenue generated by searches conducted on its own site.

Ivory holds 21.4 million, or about 1.5 percent, of Yahoo’s shares.

Yahoo could not be reached for comment. Microsoft spokesperson Brittany Robbins declined to comment.

‘They’re Dreaming’

Ivory’s proposal is unlikely to come to fruition, according to Colin Gillis, managing partner at Click Capital Research.

“They’re dreaming,” he told the E-Commerce Times. “It’s almost pathetic. I would like a new BMW. There are a lot of things people would like. But this investor urging Yahoo’s board to do a deal in public reduces any leverage Yahoo’s board would have during negotiations.”

Ivory’s maneuver is an “amateur move,” Gillis said, that is counterproductive to getting a deal between Yahoo and Microsoft done.

“When they’re sitting across each other at the negotiating table, the Microsoft guys will tell the Yahoo guys that their shareholders are telling them they have to sell,” he said.

Yahoo Headed Nowhere?

Yahoo’s options are extremely limited, Sid Parakh, an equity analyst at McAdams Wright Ragen, told the E-Commerce Times.

“Clearly, any Yahoo shareholder would want a deal to happen,” he said. “I think as a standalone company, Yahoo is headed nowhere. From an investor standpoint, the only exit strategy at this point appears to be a Microsoft deal.”

The biggest question is whether Microsoft will pay $15 billion for the search assets.

“You can make arguments both ways,” Parakh said. “For Microsoft, they could increase market share [in search] pretty nicely. For Yahoo, it would bring value to shareholders.”

Click Capital’s Gillis put it in even starker terms.

“Let’s say Microsoft says no [to the $15 billion search deal],” he said. “Where is Yahoo going to turn? There’s a very limited audience for this asset, and that audience is Microsoft.”

A Declining Asset

Over the last several quarters, Yahoo’s share of the search advertising market has continued to decline, largely at the hands of search engine powerhouse Google, said Parakh.

“I actually think that Microsoft is probably much better positioned versus Yahoo to gain market share in search going forward,” he said. “The other thing to consider is that Yahoo’s been losing some pretty impressive talent to Microsoft. I think Microsoft is getting what they need from a talent perspective.”

Case in point: Just last week, Microsoft recruited Yahoo’s former search chief, Qi Lu, to head up its online services unit.

Lu’s hiring was clearly a “setup for taking over Yahoo Search,” Gillis said.

Crystal Ball

Ivory’s proposal is just that — a proposal, “and that is important to keep in mind,” Parakh cautioned.

That said, it may only be a matter of time before Yahoo sells its search business to Microsoft.

“When the new CEO comes in for Yahoo, Microsoft will get Yahoo’s search assets — sometime in 2009,” predicted Gillis. “There will be a lot of impetus for Yahoo to do a deal, and Microsoft will have all the leverage.”

However, it’s unlikely the terms proposed by Ivory will result in a sale, Gillis noted. “They overvalue the search assets — assets that are losing share in the search market and have no real competitive edge.”