If you went to sleep with visions of Microhoo, and find yourself waking up to thoughts of Murdochsoft or AOLhoo, you're not alone. Much has happened since yesterday's market close, when Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT) remained stalemated in takeover talks.
Overnight media reports now find Yahoo! in talks to combine with Time Warner's (NYSE: TWX) AOL, while Microsoft's reportedly in cahoots with News Corp. (NYSE: NWS) to better snag its quarry. The Murdochsoft deal -- OK, let's call it Microfox, since it's really just about News Corp.'s Fox Interactive Media online arm -- is being portrayed as a unified front to make a new run at Yahoo!, but it may just have to settle for being a stand-alone combination.
A closer look at Microfox
Microfox would transform Microsoft into a social-networking juggernaut. The crown jewel in Fox's portfolio is MySpace; Microsoft already has an online advertising deal in place with Facebook.
Social networking has been getting a bad rap lately. Google (Nasdaq: GOOG) blamed the niche -- a direct shot at both its own Orkut site and its $300 million-a-year ad deal with MySpace -- for part of its fourth-quarter profit shortfall.
Social-networking sites draw in cash-strapped teens more interested in connecting with peers than generating leads for advertisers. These sites are destined to remain less-than-lucrative territory, but Microsoft is no doubt hoping that what its social-network ad efforts lack in profitability, they can make up in volume.
Other recent shots at social networking:
- News Corp. backed off its initial Internet revenue projections for this fiscal year.
- Users fought down Facebook's attempts to milk more out of its pages through intrusive social ads.
- United Online (Nasdaq: UNTD) had to cancel its Classmates.com IPO.
These trends may not be enough to deter Microsoft. After all, it was initially interested in Yahoo!, where nearly half of the site's page views -- according to Alexa.com -- come from Yahoo!'s equally tough-to-monetize free e-mail service.
Microsoft's logic is flawed. It sees this as an arms race, but it's loading up on peashooters. That won't serve it well when it charges into battle against Google's big guns.
Still, the House of Gates has to do something, especially since its initial unsolicited buyout bid triggered this crazy string of tumbling dominos in the first place -- apparently sending Yahoo! into Google's camp.
A closer look at AOLhoo
Yahoo!'s potential hookup with AOL -- specifically, AOL's high-margin websites, rather than its low-margin Internet access services -- also seems based more on quantity than quality. The companies would combine their e-mail and IM properties, which are traffic-rich but monetization-poor.
The tricky part of this deal for Yahoo! shareholders is that it assumes that Yahoo! would acquire the smaller AOL, instead of being snapped up at a premium itself.
To help offset the inevitable freefall in Yahoo! shares under that scenario, the deal will be structured to allow Yahoo! to support its share price with a massive share buyback. The Wall Street Journal reports that Time Warner would contribute AOL.com and cash for a 20% stake in the new venture, with the greenbacks going toward an aggressive repurchase.
A final look at Microhoo
None of this means that a combination of Yahoo! and Microsoft is dead. The allegiance of Microsoft and Fox Interactive may signal that Microsoft will either sweeten its offer, or bring more to the table as a Yahoo! partner, now that MySpace is in its scrapbook.
Either way, after more than two months of crickets chirping as the two companies dragged their feet finalizing a deal, it's clear that this will be an April to remember. Everyone is on the clock. Microsoft has threatened to pull its offer by April 27. Yahoo! will now test Google ads on its pages for two weeks.
So much is happening. Who knows what the final product will be. Microfoxhoo? Goohoo? AOLFox? Keep 'em coming.
The saga continues:
