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April 9, 2008, 10:35 pm

AOL and Yahoo plan to strike a deal, Microsoft retaliates

By Yi-Wyn Yen

Yahoo and Time Warner’s AOL are negotiating a deal to combine their Internet operations, a source told Fortune.

The news was initially reported in the Wall Street Journal, which stated that Time Warner (TWX) would fold AOL into Yahoo and make a large cash investment for a 20% stake of the combined company. In return, Yahoo would repurchase several billions of its shares in the mid-$30 range. Time Warner is also the parent company of Fortune and CNNMoney.com.

For Microsoft, this means war. The Journal and New York Times have also reported that Microsoft (MSFT) is now in talks with News Corp. (NWS) for a joint bid for Yahoo. Last Saturday, Microsoft CEO Steve Ballmer sent a strongly-worded letter to Yahoo’s shareholders that it should accept its offer within three weeks or face a proxy fight to nominate a new board of directors.

Yahoo is also looking at a possible advertising deal with Google (GOOG). Just hours before the news leaked of Yahoo’s advanced talks with AOL, the Internet portal announced that it would run a preliminary two-week test to run Google’s search advertising.

Yahoo, which has rejected Microsoft’s bid worth $31 a share, is hoping that a partnership with AOL and a possible advertising deal with Google, will be a more attractive offer to its shareholders. There’s no guarantee that Yahoo’s shareholders will go along with the deal if Microsoft comes back with a higher offer.

Many industry watchers continue to believe that accepting a deal with Microsoft is the best solution for Yahoo. “We continue to believe reaching a mutual agreement with Microsoft would be the best way for Yahoo to potentially extract a higher bid,” wrote UBS analyst Ben Schacter in a note late Wednesday. “The alternative would be for Yahoo shareholders to tender, although this process would not be as expeditious as if the two sides were to come to terms, and could involve a lower offer price, making the battle potentially even more protracted.”

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Yahoo will never have an offer so good like those from Microsoft… I suggest them to accept the deal… if not, someday they will discover that Yahoo has not a value so high… that’s why I don’t understand the advantages for Microsoft to buy it

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Posted By Gaetano Marano – Italy : April 12, 2008 12:01 am

One this for sure, Yahoo’s potential value (or engineers) is worth a lot more than its current actual value. Or else Microsoft wouldn’t go to the extremes to take over Yahoo. You definitely cant disagree with that. That’s pretty much what Yahoo is asking for. It’s potential value.

Posted By Anonymous : April 10, 2008 3:44 pm

It really goes to show how times have changed. A decade ago this deal would’ve been automatic. Guess it’s harder for Microsoft to do business when it’s not a “monopoly”.

However, I don’t know why Yahoo wants to take over AOL. Are they trying to go bankrupt? They do realize they’re not a media conglomerate like Time Warner that can absorb the losses, right?

Posted By Tony – Dover, NH : April 10, 2008 3:43 pm

I don’t understand how anyone could argue that an Yahoo/AOL deal would beat an Yahoo/MS one. MS can integrate Yahoo with IE and its resources and give Google a real run for once in this industry. Anyone one who is against this is not very rational.

Posted By Joh, Laguna Niguel, CA : April 10, 2008 12:50 pm

We can say the same thing for Microsoft Window’s live. Yahoo will pretty much end up like that, assuming the acquisition goes through.

Posted By Anonymous : April 10, 2008 11:28 am

hey wolfie you think you severed your ties with AOL? Think again it might take you 3 more months. Cancell any form of payment you were sending to them or they will continue to bill you for months to come GOOD LUCK

Posted By vic cape coral florida : April 10, 2008 11:20 am

Yahoo overestimates its value and importance in the marketplace. They should have taken the money and run. But to team with a laughingstock like AOL – that’s just… sad.

Posted By Rich, Denver CO : April 10, 2008 11:17 am

Common sense says Microsoft should leave this Yahoo deal and spend money in something useful.AOL is going to suffer same fate when it merged with Time warner.Yahoo is doing idiotic thing by rejecting the bid. Microsoft is doing idiotic thing to try and close the deal. If I’m top guy at MSFT(Day dream, thats different), I’d rather look for sensible and useful acquisitions than paying $40b for Yahoo,which doesn’t deserve for that money.

Posted By Guruprasad, Chennai, India : April 10, 2008 11:10 am

Yahoo is just a fake Google. AOL is just… well AOL. They both should have disappeared years ago.

Posted By mb, nyc, NY : April 10, 2008 10:49 am

What is best for customers? Deal with MS will mean end of user choice.

Posted By Anonymous : April 10, 2008 10:18 am

I wish everyone would stop hating on Microsoft build a better produce. Yahoo would rather get in bed with the company that beat it in its market than sell to Microsoft. Google is laughing all the way to the bank. What will be gained with AOL when I hear AOL I think SLOW (Dial Up internet) are there people that still use Dial Up Internet. Let Microsoft buy this company and compete with Google. Oh! Maybe that is the real problem. If you real want to beat Microsoft build a better produce that people will use.

Posted By Mike, San Diego, CA : April 10, 2008 10:10 am

I think Yahoo should take the deal from Microsoft. Google is like the NY Yankes of search engines. They are the evil empire. While yes, the AOL deal does sound like it is a good one, I don’t think they would last.

Posted By Steve, Sidonia, TN : April 10, 2008 9:56 am

It took me over an hour on the phone to finally cut my ties with AOL. I’m currently using Yahoo, however, if they join with AOL, I’m going elsewhere.

This is terrible news for a lot of people.

Posted By Wolfie, Decatur, Alabama : April 10, 2008 9:53 am

I’m certainly no fan of the mega-monster Microsoft, but if Yahoo takes on AOL, I vow I will never use another Yahoo tool or product again. And that will hurt because I’ve had their email for over a decade!

Posted By Wyatt, Overland Park, KS : April 10, 2008 9:37 am

Good! Resist the mega power Microsoft who beleives that can buy up any resource they can to dominate that market. I hope Yahoo shareholders think what’s best for Yahoo and not what’s best for their wallet.

Posted By Rick, Orlando, Fl : April 10, 2008 9:29 am

In this whole drama, Microsoft has already lost. Even if this hostile acquisition of Yahoo goes through, I doubt any Yahoo engineer would be excited about working in the new shop.
And for a software company, its people are its biggest assets.

Posted By Sanjay B, Redmond WA : April 10, 2008 9:19 am

yahoo is a sinking ship with its best already over.

Posted By Anonymous : April 10, 2008 9:19 am

Well we can all assume at some point in the future many of these portal service providers will be consolidated. It will come down to who has the most capital to invest and from what I can determine Microsoft or Google will be the dominant players in the years to come, especially if Yahoo and AOL merge which I feel is a desperate move for both companies.

Posted By Nik, Harrisburg PA : April 10, 2008 9:10 am

Adding anything to Microsoft is ‘not a good deal’.

We don’t need an Internet Monopoly, thank you!

Posted By MIke, Coronado, CA : April 10, 2008 8:56 am

If MS does buy Yahoo!, I’m ditching my Yahoo! accounts. Too bad… I like the new email and have been happy using Yahoo Messenger. I guess gmail and google talk, here I come…

Posted By Todd, Madison, WI : April 10, 2008 8:55 am

AOL and Yahoo are currently both hemorrhaging companies. TW realizes that it needs to do something to cut its enormous losses from the purchase of AOL.

Since AOL/TW acquired advertising.com it has become the largest media display company (thus shifting AOL’s focus as being a dial-up ISP) – a brilliant move.

Combining AOL with Yahoo would further solidify the advertising powerhouse’s overall web reach and make it a true threat to Google’s PPC advertising reach.

Since when did competition become a “catastrophe”?

Posted By Justin, Phila Burbs, PA : April 10, 2008 8:54 am

AOL has destroyed itself, and now……..OH LORD, bye bye to an excellent Yahoo, in itself better than Microsoft or Google or anyone. Bye Bye dear friend Yahoo.

Posted By Del, St Joseph, Mo : April 10, 2008 8:50 am

I use AOL and Yahoo for email and IM only. Everything else they offer is useless anyway so it doesnt really matter if they combine forces.

Posted By Jade Martin, Niagara Falls, ON, Canada : April 10, 2008 8:49 am

I hope Yahoo and AOL go through with their deal. After that, maybe a merger between the two, then the time would be right for Microsoft to step in and take both for the price of one.

Posted By Bruce, Drakes Branch, VA : April 10, 2008 8:47 am

Dear Wall Street Bone Heads – A Yahoo! – Microsoft combo would be disaster by all measures. Pull your heads out of your ledgers and think about “VALUE”… there is no value in this consolidation. Yahoo! is an innovation engine and Microsoft is a slow moving behemoth.. is it now a good investment to kill an innovative company?

Posted By Sean Goggins, Columbia, MO : April 10, 2008 8:45 am

Microsoft is going down hill since the advent of VISTA. Ubuntu is taking over a large share of the world’s operating system…such as in Russia, Spain, Switzerland. Better Yahoo go with Google than Microsoft.

Posted By Terik Ororke : April 10, 2008 8:43 am

A lot better than combining it with Microsoft. Microsoft will run Yahoo into the ground. As a user of yahoo, I will definitely close my yahoo accounts. It’s funny how Microsoft is complaining about the advertising deal with Google saying that its anti-competitive when Microsoft owns over 90% of the browser market and it’s OS is on over 85 – 90% of the world’s computer. Personally, I hope the Microsoft/Yahoo merger falls through. If it is successful, it will just push users and yahoo employees over to the Google camp.

Posted By Jo, Laurel, MD : April 10, 2008 8:32 am

What a bone-headed move by Yahoo! Jumping in bed with AOL just to spurn Microsoft. If I were a Yahoo shareholder right now I would be royally po’d. There is absolutely no logical business sense to this combination. Throw my hat in the ring with Microsoft on this. Go get’em guys.

Posted By Dave, Akron, Ohio : April 10, 2008 8:32 am

How is it possible that arguably the second best online service company (second to only google) is in need of one of the two absolute worst online service companies. Microsoft has literally destroyed just about everything they have touched, and Yahoo would be no different. AOL is a fossil long past it’s day and certainly wouldn’t save Yahoo.

Posted By James, St. Louis MO : April 10, 2008 8:28 am

I think this whole process is very positive regardless of the outcome. It forces companies to think better and faster, shaking the shallow status quo. The progress that they make is like evolution on steroids. I expect shareholders and the public to be the real winners when it is all over.

Posted By Vlad Mayzel, Vancouver, BC : April 10, 2008 8:19 am

Microsoft is a monopoly. The industry needs more competition – not less.

Posted By Heide, Auburn, IN : April 10, 2008 8:09 am

I agree. An AOL and Yahoo! merger would be horrible. Yahoo! needs to merge with MSFT. I don’t understand why Yahoo! would be talking to Google. All that is going to do is cause problems to Yahoo! users. We use Yahoo! because we like Yahoo! Not because its partnered with Google.

Posted By John Bryant Memphis, TN : April 10, 2008 8:04 am

The equation works like this:
MSFT + NWS + YHOO = Social Repression.
Now that would be a catastrophe.

Posted By M. Schultz, Sedona, AZ. : April 10, 2008 7:58 am

Why do executives in their ivory towers keep thinking that 1+1=3? It is so hard to combine two large companies. Remember…

AOL + Time Warner?
Sprint + Nextel?
Daimler + Chrysler?
Sears + K-Mart?

All of these went so well, didn’t they?

Posted By JCP, Vienna, VA : April 10, 2008 7:58 am

I wish Yahoo had this kind of fight when they purchased Broadband.com, Hotjobs, Geocities…..
Instead they sat on their duffs and watched as Apple, CareerBuilder and MySpace walked right past them.

Posted By Gary, Chicago, IL : April 10, 2008 7:57 am

I agree with that statement. AOL is a dying breed. For them to take over Yahoo will be the end. AOL died in popularity many many years ago. This is not a good move for yahoo.

Posted By Niv, Columbus, OH : April 10, 2008 7:54 am

Yet another reason to hate Microsoft! GO Macintosh/Apple.

Posted By M. Earl, Mpls, MN : April 10, 2008 7:53 am

i think yahoo should combine with microsoft, not aol. aol has always seemed to be for children, and yahoo more for adults. everybody is always downing microsoft, i have been using windows without problems for a long time. the only problems i have had are from virus’s spyware, and cookies that spy on me. yahoo could use the cash loaded microsoft to improve, and expand yahoo to make it more competitive with other search, chat, email, and multi-media compition. i don’t see why everybody is against microsoft, just because they are a big company that has money, and makes a good profit. that is what they are in business for anyway. their products work well, they hire mostly educated people, and pay them well with good benifits. plus their profits stay here in the U.S.A. go microsoft.

Posted By Jim, St. Peters, Missouri : April 10, 2008 7:04 am

To Some extent, I believe Yahoo is doing this mainly to get a higher offer out of MSFT. At the same time, Yahoo has been making a lot o bad decisions recently, so maybe they are simply just idiots.

Posted By Michael Brown, Baltimore, MD : April 10, 2008 7:02 am

I detest Microsoft’s shoddy operating systems, which is why I switched to Apple. To see Microsoft expand its evil empire would be a disaster in the world of tech. Run Yahoo! Run!

Posted By Dylan, Sacramento, CA : April 10, 2008 3:49 am

Right now I am not happy with Internet Service on the whole including, AOL. Too combine AOL with Yahoo would be a catastrophy!

Posted By L. Mero, Aurora, OR : April 10, 2008 12:38 am
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