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November 29, 2008 9:04 PM

Sunday Times report has Microsoft discussing deal to buy Yahoo search for way too much

Posted by Benjamin J. Romano

A report in The Sunday Times (of London) late today outlines a complex potential deal between Microsoft, a pair of digital media heavyweights and Yahoo, but several elements in the story don't add up and already one of the principals has denied knowledge of such a deal.

"SOFTWARE giant Microsoft is in talks to acquire Yahoo's online search business for $20 billion (13 billion pounds)," reads the opening paragraph of the story, dated Sunday.

Before we go much further: Why would Microsoft do a $20 billion deal for Yahoo's online search business -- certainly something that Microsoft has coveted -- when all of Yahoo is worth only $15.96 billion.

The story, which quotes no source by name and is written in that awkward passive voice ("it is thought") that screams thinly sourced, goes on to describe a complex transaction that would install former AOL Chairman and CEO Jonathan Miller and former Fox Interactive Media President Ross Levinsohn as leaders of a new management team -- presumably of Yahoo, though the story doesn't say so explicitly.

However, VentureBeat is reporting that Levinsohn is not aware of any such deal: "We've reached out to Levinsohn who says of the Times Online report: 'No truth to it. News to us.' "

The Times story continues: "Senior directors at Microsoft and Yahoo are understood to have agreed the broad terms of a deal, but there is no guarantee that it will succeed."

A Microsoft spokesman said via e-mail late Saturday that the company had nothing to add beyond CEO Steve Ballmer's comments at the company's shareholder meeting. During the Nov. 19 shareholder meeting in Bellevue, Ballmer said, "We are done with all acquisition discussions with Yahoo," but left open the possibility of a "search collaboration" between the two companies. "[T]here's no active discussion on that front, but we'd be very open to it," Ballmer said.

Microsoft also made no comment to The Sunday Times.

The Times story describes a transaction that would put the search business in Microsoft's hands, though as I said earlier, the numbers don't make much sense (and I'll add the caveat that I'm all tryptophaned out, so who knows):

"Microsoft would provide a $5 billion facility to the Miller and Levinsohn management team. The duo would raise an additional $5 billion from external investors.

"This cash would be used to buy convertible preference shares and warrants which would give it a holding in excess of 30% of Yahoo.

"The external investors would also have the right to appoint three of Yahoo's 11 board directors. The talks with Yahoo involve Microsoft obtaining a 10-year operating agreement to manage the search business. It would also receive a two-year call option to buy the search business for $20 billion. That would leave Yahoo to run its own e-mail, messaging, and content services."

I'll be keeping an eye on this Sunday and updating as appropriate. Meanwhile, enjoy the rest of your Thanksgiving weekend.

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