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Microsoft May Increase Bid For Yahoo, Source Says

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Bloomberg News

Published: May 3, 2008

Microsoft Corp. may raise its takeover offer for Yahoo Inc. to more than $31 a share, seeking to end a three-month standoff with the Internet company's board, a person familiar with the matter said Friday.

Microsoft is considering increasing the offer as talks with Yahoo intensify, said the person, who asked to remain anonymous because the talks are private. The original cash-and-stock bid was worth $31 a share and has since fallen to $29.40.

The talks may break an impasse between the companies and prevent Microsoft from pursuing a hostile takeover of Yahoo, the second-most popular Internet search engine. Microsoft Chief Executive Officer Steve Ballmer would use the purchase to bolster competition with Google Inc., the leader in the $41 billion online advertising market.

"The pressure that the board felt to do what's right for shareholders pressured management to start discussions," Canaccord Capital analyst Peter Misek said of Yahoo. "Wearing the board's shoes, I think I would be exposing myself to some pretty serious shareholder issues" if Microsoft had walked away.

Yahoo shares climbed $1.86 to $28.67. Microsoft fell 16 cents to $29.24. Google declined $11.79 to $581.29.

Ballmer had said repeatedly that the world's biggest software maker wouldn't raise the price. Yahoo CEO Jerry Yang may have persuaded him by floating the possibility of tightening ties with Google.

Yang may agree to use ad software from rival Google within a week unless he reaches an agreement with Redmond, Wash.-based Microsoft on a takeover, the person said.

Yahoo, based in Sunnyvale, Calif., ran a test last month of Google's ad system while examining ways to boost revenue and win support from shareholders as Yang held out for a higher bid.

Mountain View, Calif.-based Google charged as much as 70 percent more than Yahoo for ads from each U.S. search query last year, Yahoo has said. The test of Google's ad system initially applied to 3 percent of its search queries. If the company extends that to all of them, it may generate more than $1 billion in incremental cash flow, Citigroup Inc.'s Mark Mahaney said in a report last month.

The San Francisco-based analyst, who advises investors to buy Yahoo, said then that the deal might force Microsoft to boost the price. Yahoo had said its rank in the U.S. search market and its Asian operations warrant a higher bid.

Ballmer said Friday that he would walk away from the purchase before he overpays for Yahoo.

"I know exactly what I think Yahoo is worth to me, exactly," Ballmer said in a meeting with employees, according to remarks provided yesterday by Shaw. "I won't go a dime above, and I will go to what I think it's worth if that gets the deal done."

An acquisition higher than $31 a share would be the largest technology purchase in history, eclipsing Hewlett-Packard Co.'s $18.9 billion deal for Compaq Computer Corp. completed in 2002. Buying Yahoo would give Microsoft the most visited Web site in the United States and almost double its share of Internet searches there, according to researcher ComScore Inc. in Reston, Va.

The buy also would turn Microsoft into the biggest seller of graphical-display ads. Sales of those ads in the U.S. may increase 39 percent to $8.19 billion in 2011, accounting for about 20 percent of the total market.

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