Yahoo is exploring a possible alliance with media conglomerate News Corp. to stave off a take-over by software giant Microsoft, The Wall Street Journal reported on Wednesday.
Rupert Murdoch's News Corp. owns the Journal, as well a global media empire that includes popular online social networking website MySpace, Dow Jones, Fox News, and 20th Century Fox.
A potential deal outlined in the Journal centers on combining MySpace and other News Corp. properties with Yahoo in exchange for a stake of 20 per cent or more in the California Internet search veteran.
Such an alliance would enable Yahoo to maintain its independence and thwart a hostile takeover by Microsoft, which has vowed to continue its bid to buy the company despite Yahoo rejecting a $44.6-billion offer on Monday.
Yahoo maintains it is looking into many strategic alternatives to being gobbled up by Microsoft, which wants to merge the two companies' resources to better challenge Internet colossus Google.
Analysts caution that alliance talks with News Corp. could be part of a strategy by Yahoo to pressure Microsoft into upping its offer.
Yahoo's board rejected the Microsoft offer of $31 per share as too low and reportedly thinks the firm is worth at least $40 per share.
"We do not believe that News Corp. would augment the value of its Internet properties by merging its assets into Yahoo," Cowen Analyst Jim Friedland said in a research note published by Thompson Financial.
"We believe News Corp. would be ill-served by trading one of its most valuable growth assets for a non-controlling stake in a struggling company."
News Corp.-owned Fox Interactive Media would not fix flaws in Yahoo's operations and the Sunnyvale, California-based company does not need a cash infusion, according to Friedland.
Yahoo is also reportedly in alliance talks with faded Internet search start America On Line (AOL), now owned by Time Warner.
Yahoo is evidently "floating ideas" to gain leverage in negotiations with Microsoft, according to analysts.
"Yahoo is trying to improve their bargaining position right now," analyst Rob Enderle of Enderle Group in Silicon Valley told AFP.
"They want Microsoft to come up with more money. Yahoo knew if it just walked away from the offer its stock would drop 50 per cent and the share holders would come after them with pitchforks."
Yahoo tie-ups with AOL or News Corp. would not increase Yahoo's value to the amount being offered by Microsoft, Enderle said.
"Microsoft would be smart to raise their price a little bit just to get this over with," Enderle said. "The longer they wait the less value there is in the property. Yahoo will start bleeding people."
Whether Microsoft ups the ante or goes hostile hinges on what institutional share holders want, and indications are they are reluctant to raise the offer for Yahoo, principal analyst Matt Rosoff of Directions on Microsoft told AFP.
Yahoo's board said it decided "after careful evaluation" that Microsoft's bid "substantially undervalues Yahoo."
Microsoft called the board's action "unfortunate" and urged Yahoo to reconsider its blockbuster bid to combine the two tech titans and said it offers "superior value" to Yahoo shareholders.
Microsoft can stage a coup by ousting the Internet firm's board of directors. Yahoo's 10 board members are up for re-election mid-year.
"As we have said previously, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value inherent in our proposal," Microsoft said.
Microsoft says it is prepared to tap into financial markets and leverage a buyout for the first time since it was founded in 1975.
"Microsoft obviously views Google as a supreme threat to their business and is concerned that Google is in danger of locking up monopoly power in Internet advertising," Rosoff said.
"Just the fact that Microsoft went public with the offer shows that this is a top corporate priority."
Yahoo has lost ground to Google in Internet search and online advertising.
Google is bolstering its position with acquisitions including that of online ad-targeting titan DoubleClick.
"If Google gets all these little pieces in place, and Microsoft doesn't do something, the money Google makes will pay for a lot of other businesses including hosted applications," Rosoff said.
Google is inexorably expanded offerings of free on-demand online software applications that compete with packaged software such as Office that have long been at the heart of Microsoft's profitability. (AFP)
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