Microsoft and Yahoo – a match made in heaven or hell?

6th October 2011

The Daily Mail considers the deal and reports on the 10 per cent share price jump.

It quotes McAdams Wright Ragen analyst Sid Parakh, who says: "There are many reasons why this thing probably makes sense. If you strip out the variety of assets Yahoo owns, you are pretty much paying nothing for the core business."

The Wall Street Journal Market Watch's David Callaway is also one of those in favour.

"For all the hardship Yahoo's management and board of directors have taken from investors for lack of leadership and direction, it is still a stunning group of Internet assets, with a massive reach of almost 700 million unique users.

"The question of whether Yahoo is a tech company or a media company was actually resolved by ousted CEO Carol Bartz before she was fired. Her vision was that it would be a media company, and at the time of her firing she had made several steps to head in that direction. One of them was to hire Jai Singh as editor-in-chief of the news products."

But Heard on the Street's Martin Peers thinks Microsoft should be kingmaker not buyer. The main thrust of his argument is that Microsoft may not be able to extract the value from assets – notably Chinese search engine Alibaba that other firms could.

He writes: "There is no guarantee a Microsoft-controlled Yahoo could get that $32 billion valuation for its Alibaba stake, given the paucity of likely buyers. A Microsoft-controlled Yahoo would likely be dealing with Alibaba itself, which has every reason to push for a lower price.

"And most importantly, there is the question whether Microsoft would be more successful than Yahoo's past management in turning around the company. Microsoft has, at best, a mixed track record with online businesses. And if it failed to turn around Yahoo, both its investment in the buyout and its search investment would be at risk."

Financial Post without identifying the source reports on two camps at Microsoft.

The website reports that "No decision has been made and a bid may not materialize as there are internal divisions at the software company on whether it should pursue Yahoo again, a high-ranking Microsoft executive said."

"One camp inside Microsoft is hot for the deal, believing that it would obliterate AOL Inc as a competitor and create a strong Web portal that can offer better products to audiences, advertisers and end users, the executive said.

"However, another camp is against the deal, feeling that if Microsoft is going to invest billions of dollars in an acquisition it should be one that has more growth potential. Microsoft last tried buying Yahoo in 2008, offering to pay as much as US$47.5 billion, or US$33 per share."

But is there another route in for Microsoft without buying Yahoo outright?

The Wall Street Journal suggests that US broker Stifel, Nicolaus sees a potential deal occurring through a round of investment into Alibaba from firms that might include Microsoft, Softbank and private-equity firm Silver Lake which would then take over firm.

However the WSJ notes one 'Great Wall' in the way of any deal involving China's Alibaba and Yahoo.

The U.S. government may not allow it.

More from Mindful Money:

Steve Jobs, the tributes, the legacy, the challenge for Apple and one warning

Apple: More money than the US government

Social media: where should you invest next?

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