Throwing Good Money After Bad at Yahoo!

The Microsoft-Yahoo! rumors are back in full swing. The Times Online (see article) is reporting that Microsoft is in serious talks to acquire the search business of Yahoo! for $20 billion, much less than the original $47.5 billion offered for the company this past summer. Details have Microsoft obtaining a 10-year agreement to manage the search business with a two-year call option to buy the search business for $20 billion, which would leave Yahoo! with its email, messaging, and content services businesses. It is worth noting that the BoomTown blog is reporting that the story may be "Total Fiction," based on comments from those who are reported to be involved in the deal (see post). The post also mentions how the entire market cap of Yahoo! is just $16 billion. Yet, offering a premium to shareholders, even for only the most valuable part of the company, is certainly not unheard of.

The rumors have been given some leverage with the recent announcement that Jerry Yang, the CEO of Yahoo! will be stepping down as soon as a replacement can be found. Yang was thought to be the main roadblock to a summer merger. The news that Google has decided to pull out of its advertising deal with Yahoo! also helps to clear the path for a new merger agreement (see MarketWatch article). Always one to sense an opportunity, Carl Icahn has begun purchasing more shares of Yahoo! (see WSJ article), recently adding 6.8 million shares, raising his stake to about 5.5 percent of the company. The additional $67 million is a drop in the bucket compared to the nearly $1 billion that Icahn has already lost on previous positions, but does give him more bargaining power regarding any future board members and CEO.

Whether all of this is just another case of throwing good money after bad is yet to be seen. Yahoo! stock is up a few dollars to $11.51 per share after falling to a 52-week low of $8.94 a share. While Icahn has made some money on his recent purchases (average cost of around $9.88 a share), he may once again be at the mercy of any potential deal in order to realize the original value he was hoping to receive. With a larger stake, and current CEO Yang now less of a roadblock, Icahn may finally get the deal he wants, even if it ends up costing him after all is said and done. Retail investors that skipped the first and second rounds of merger talks, but have now entered after the most recent round of speculation, may fair better. Of course, this may have less to do with Microsoft and a growing Icahn put, and more to due with a market that is attempting to build a bottom and change momentum.