Although Microsoft provided no details Sunday about what deal it might cut with Yahoo, it seems highly likely that search advertising would be a major piece.
Search advertising continues to be the largest segment of online advertising and is the fuel that has propelled Google's revenue and profits to levels that have made Microsoft green with envy. "There's got to be some search component to the deal," said industry analyst Greg Sterling of Sterling Market Intelligence.
What shape the tie-up might take is anyone's guess. It could be some sort of joint venture in which the companies pool assets and create a larger ad network, Sterling said. Or it could be an agreement for Yahoo to outsource part of its search advertising business to Microsoft, along the lines of what Yahoo has reportedly been negotiating for weeks with Google, he said.
What's clear is that since Microsoft withdrew its offer to buy Yahoo for US$33 per share on May 3, Yahoo's management and board have been bombarded with complaints from shareholders.
Last week, billionaire investor Carl Icahn turned up the heat even more when he put forth a slate of 10 candidates and announced his intention to launch a proxy fight to oust Yahoo's board at the company's shareholders meeting in July, and strike an acquisition deal with Microsoft.
"Yahoo is under pressure to show shareholders some deal, probably with Google but maybe not just with Google, to give them some assurance of value on the immediate term," he said.
Of course, it's not great news for Yahoo shareholders that Microsoft is now only interested in doing a limited, narrow deal with Yahoo, said Brian Bolan, research director at Jackson Securities.
To Bolan, it seems evident that Microsoft has rethought its plan to buy all of Yahoo. "The clear indication of this is that Microsoft has looked through this soup-to-nuts and it has realized there's only a couple of parts of Yahoo that they really want. They don't want to duplicate services and features much in the way Yahoo has done over the years within its own properties," Bolan said.
One thing Microsoft does want and need is better search technology and better search monetization, so it's likely that Microsoft is eyeing Yahoo's assets in this specific area. But whatever form the deal takes, it will not be worth anywhere near what Microsoft had been ready to pay to acquire Yahoo, he said.
Consequently, Bolan expects Yahoo's stock to take a significant hit on Monday, as disappointed investors react to Microsoft's statement that it's not currently interested in a full-blown acquisition. "That's going to take a lot of the M&A [merger and acquisition] premium out of the stock," Bolan said.
"The stock has been running up on the idea of a bunch of people buying shares to try to force this [Microsoft acquisition] deal, to try to make this happen," he added.
A limited deal with Microsoft means that Icahn will likely push ahead with his proxy fight, so that with control of the board, he can carve out an acquisition deal, which at that point will likely be for somewhere at or a bit above the mid-$20 per share range, Bolan said.