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Whispers of News Corp/Yahoo! partnership
But can anyone really rival Redmond's bid?

By Reuters

Published: Thursday 14 February 2008

Yahoo! is in talks on a possible deal with News Corp but analysts have said an alternative was unlikely to emerge to rival Microsoft's bid for Yahoo!, now valued at $42.1bn.

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News of the talks to combine their web properties was first reported on the Silicon Alley Insider blog on Monday, which said one proposal would involve a cash infusion from Rupert Murdoch's News Corp and an unnamed private-equity fund.

A source familiar with the situation said Yahoo! and News Corp were talking about a deal but could not confirm any details.

The Wall Street Journal reported that a deal being discussed would give News Corp more than a 20 per cent stake in Yahoo!. It said the talks valued News Corp's MySpace online social-networking site at between $6bn and $10bn.

Sanford C Bernstein analyst, Jeffrey Lindsay, said: "Any options other than Microsoft are all... fraught with serious consequences. The management has left it to so late in the day to really find any alternative. They have basically backed themselves in the corner."

Analysts say alternatives, such as a News Corp partnership, might have long-term strategic benefits for Yahoo!, but would not give its shareholders an immediate investment return like Microsoft's $31-a-share buyout offer.

As a result, if the Microsoft bid were to fall through, analysts expect Yahoo! shares to plunge. The stock was trading below $20 per day before Microsoft's proposed $31 offer was made public.

Investment bank RBC Capital's, Jordan Rohan, said: "It is hard to imagine that Rupert would be willing to put enough cash in the deal to make it interesting to Yahoo! shareholders."

Rohan said: "Yahoo! stock would settle out at $15 share, depending on how much cash was in the picture," reflecting a widely held sentiment on Wall Street that Microsoft's price has raised an insurmountable hurdle to alternative bidders.

Yahoo! on Monday turned down Microsoft's bid, saying it did not properly assess the worth of the web pioneer's wide audience, online-advertising investments, cash-generating ability and growth prospects of overseas holdings.

Microsoft responded by saying its offer was "full and fair" and it reserved the right "to pursue all necessary steps", but it did not give details on what it would do next.

On Wednesday, Yahoo! chief executive Jerry Yang took the company's case for remaining independent to shareholders, sending a letter that largely repeated arguments made in a regulatory filing and a letter to employees earlier this week.

Many analysts expect Microsoft to sweeten its bid to at least $35 a share and as much as $40 a share.

Murdoch has held on-again, off-again talks with Yahoo! over the past year. He told analysts and reporters on a conference call last week that News Corp was not interested in bidding for or pursuing any transaction with Yahoo!.

News Corp and Microsoft declined to comment on Wednesday. Yahoo! also declined to comment and reiterated the company's position that its board continues to explore its options.