Yahoo!'s Board Trying To Box In Microsoft

The shares of Yahoo have held up quite well amidst the market sell off last week, with some attributing the strength to speculation that the board is nearing the end of the CEO search. However, there is an alternative explanation that is not getting as much press.

The latest scuttlebutt is that the board is using the press to box Microsoft into a quick deal to get back to the table for a full acquisition or a renewed deal for the search assets. The idea is that the board is signaling that it is winding down the search for a CEO and that Microsoft will need to act now (within the next two weeks) before a CEO is selected. If a new CEO is selected, then any deal will be delayed because the new CEO will need several months to a year to assess his or her strategic options - that is unless the new CEO is Sue Decker.

In an interview with CNET last week, Microsoft CEO Steve Ballmer stated that he wasn't in active discussions with Yahoo but then added the caveat "I think probably fair for us not to comment too much". This is a departure from the past and certainly toned down from his comments at CES that a deal with Yahoo is dead.

I have written numerous times in the past few months that a search deal is not imminent (see articles here and here). However, I have reevaluated my investment thinking on the stock and think it probably makes sense to park some free cash into Yahoo's stock and just sit and wait until something does happen - even if it is for 6 months or longer than a year. Might as was well do so, given that interest rates on bank savings accounts and CDs are so low.

From where I stand, Microsoft has 3% global market share of searches compared to Google's 60%+ global share and no amount of organic growth will help Microsoft close that gap in a meaningful way. Yahoo is their only major option. Further, Yahoo's branded business is under pressure due to the economic slowdown, the paid content business is a slow grower, and the search business is losing share to Google. They need each other. However, I think it makes better sense for Ballmer to acquire the whole company rather than the search assets.