Beyond Binary

Microsoft's announcement Monday that it was open to a new Yahoo deal, but only with a new board, struck some as odd. Wouldn't it be better for Microsoft to reach a pact now--with Yahoo's board on the ropes and ahead of its proxy showdown?

Perhaps, but I think Microsoft has come to the conclusion that it just can't deal with Yahoo's current board, regardless of how badly it might need Yahoo's scale.

Over the July 4 weekend, I read Barbarians at the Gate, the classic business tome about Kohlberg Kravis Roberts' takeover of RJR Nabisco. The book has many lessons that are applicable in this situation.

• Don't assume the other party has the same understanding from a meeting as you do.

• Not everyone who is interested in an asset is really willing to step up to the plate.

• Don't expect competitors to stand still.

And that's just to name a few. But the most important thing I took away was how important the human relationships were in determining who was willing to do a deal with whom.

Throughout the RJR saga, various players link up with one another or go separate ways in large part based on their personal relationships. In the end, the board of RJR Nabisco was faced with two bids. Neither was definitively better than the other. Its decision, to go with a buyout firm as opposed to its own management, rested in no small part on the fact it had lost confidence in and respect for the individuals in that management group.

In my mind, the reason is simple. Large transactions involve a whole lot of guesswork about the future. Such deals are a bet on what a business will be able to do. Since it's hard enough to predict one's own financial future, it's doubly hard to do so for another entity. That makes it all the more important to have trust in one's merger partners.

In the ever-rotating, but never stopping merry-go-round that is Microhoogle, the Wall Street Journal reported Tuesday night that Microsoft has been looking for partners in recent days that would help it make a new bid for Yahoo's search business.

The newspaper, suggests though, that because Microsoft canceled a scheduled meeting with Chairman Roy Bostock on Monday, that perhaps it is not finding any willing compatriots for a Yahoo move.

The paper also reports that Microsoft has met with Carl Icahn in recent days, urging the billionaire to keep pressing his proxy fight in an effort to motivate Yahoo's board.

Microsoft declined all comment. However, sources have told CNET News.com that large investors and at least one Yahoo director have been urging Microsoft to make a renewed bid for Yahoo's search business. Microsoft is said to be weighing such an offer.

It is also the case that Microsoft has met with nearly everyone at this point that could possibly be interested in a Yahoo bid.

The pressure on Yahoo appears to be increasing from several fronts. First, its stock price has dropped below $20 and to near where it was before Microsoft first went public with its bid on Feb. 1. Second, the federal government is moving to launch a formal probe of Yahoo's proposed search ad deal with Google. Finally, the company still faces its proxy fight with Icahn.

The Journal piece also has more detail and color about the two companies' past, failed negotiations. It makes for good reading, but I'm dizzy and going to get off the merry-go-round for a while. If anyone lands in anyone else's lap, feel free to wake me.

Proxy fights often leave shareholders feeling black and blue, but when it comes to the battle of Carl Icahn and Jerry Yang, it's a case of gold vs. white.

Icahn on Thursday filed his preliminary proxy statement with the Securities and Exchange Commission, outlining the backgrounds of his proposed director slate and encouraging shareholders to use his gold ballots to vote in the upcoming shareholder meeting. Yahoo sent a letter yesterday urging shareholders to vote for its proposed slate on its white ballots.

In his proxy, which was well timed to coincide with Yahoo's reorganization, Icahn outlines some of the steps he would propose to the new board, if it is elected.

Icahn says he would propose to (and I'm quoting directly here):

•Eliminate the Change In Control Severance Plan;

•Hire a talented and experienced CEO to replace Jerry Yang and return Jerry to his role as "Chief Yahoo";

•Inform Microsoft that unless any "alternative transaction" can (ensure) a $33 or higher stock price, all talks of alternative transactions are over; and

•Offer publicly to sell Yahoo to Microsoft in a friendly and cooperative transaction.

Yahoo's current leadership, meanwhile, says that Icahn is distracting it from its work.

"It is time for Yahoo to turn its undivided attention to implementing its key strategies, and we therefore urge you to reject Mr. Icahn's slate and his ill-defined agenda," Yahoo said in its letter, which also made the case for its deal with Google. Yahoo is also gearing up for a road show with its investors.

The shareholder vote is slated for August 1. In the meantime, Yahoo shareholders are also said to be pushing to get Microsoft and Yahoo talking again, sources have told CNET News.com.

Updated at 2:35 p.m. with a source clarifying that this letter does not mean talks are off.

On Wednesday, Yahoo issued a letter to shareholders defending its pact with Google as compared to a search deal with Microsoft.

"This carefully structured agreement strikes the right strategic balance, enhancing our financial results while advancing our strategic objectives of being the 'starting point' for the most users on the Internet and offering such compelling value that advertisers will see us as the 'must buy' in online advertising," Yahoo Chairman Roy Bostock and CEO Jerry Yang wrote in the letter, which was sent out via Business Wire.

At first blush, I took this as an indication that the latest talks, which were first reported by CNET News.com on Monday, were off again. However, a source familiar with the situation cautioned that such a reading would be a mistake.

The letter urges shareholders to vote for its director slate and against that put forth by Carl Icahn. In the letter, Yang and Bostock argue that Microsoft's proposal would have tied Yahoo's hands without offering a significant improvement to its cash flow.

"While Microsoft's search-only hybrid proposal may have been helpful to Microsoft, our board and management concluded it would have had a significant adverse impact on Yahoo! strategically, leaving the Company without the operational control of search assets and technology we view as critical to our objective of becoming a leader in the converging search and display advertising business," Yang and Bostock wrote. "The board and its advisers also carefully studied the financial impact of Microsoft's proposal and concluded that it would have provided no meaningful improvement to our operating cash flow. In short, this proposal would have generated substantially less value for Yahoo stockholders than Microsoft has suggested."

The source I talked to pointed to the exclusiveness of the deal as a key stumbling block with the original proposal from Microsoft and noted that the Google deal was a nonexclusive one.

As of June 12, when talks broke down with Redmond, Microsoft was proposing a deal in which it paid $1 billion for Yahoo's search business as well as giving it a cut of future revenue from Yahoo's search results. It would have also paid $8 billion for a 16 percent stake in the company. Microsoft argued the additional ad revenue as well as the decrease in costs would have meant $1 billion in additional cash flow per year. Yahoo disputes that math.

Microsoft said it offered to guarantee Yahoo that its search monetization would be better than that of Yahoo's Panama for the first three years.

Microsoft and Yahoo are like two teenagers who can't decide whether to go steady, break up, or just be friends.

They are once again speaking to each other, as News.com first reported on Monday. Several sources tell CNET News.com that the latest talks involve a deal short of an acquisition.

"I can tell you categorically that's not happening," one source familiar with the situation said of the possibility of a full-on acquisition. Earlier in the day, TechCrunch reported that Microsoft was interested in buying all of Yahoo, though at a lower price than the $33 a share it was once willing to pay.

Another source pointed out that Microsoft's latest statement (issued June 12) remains true--basically that Microsoft is not interested in a full purchase but remains open to talking about a search deal.

In any case, it appears Yahoo investors see any interest from Microsoft as a good thing. Shares of the company rose above $23 a share on Tuesday, though they gave up some of those gains up later in the session, changing hands recently at $21.82, up 1.7 percent, or 37 cents.

The moves come as Yahoo is gearing up for a road show to fend off a proxy bid from Carl Icahn.

News.com's Stephen Shankland and Dawn Kawamoto contributed to this report.

The Federal Trade Commission has given its approval to Carl Icahn's efforts to accumulate Yahoo holdings, according to a Reuters report.

In addition to overseeing actual mergers and so forth, the agency also looks at large stock purchases, the news agency noted, saying the approval was listed in an agency report that comes out several times a week.

Of course, of all the people looking to acquire pieces of Yahoo, Icahn is the one least likely to encounter antitrust scrutiny. Google has raised concerns over a Microsoft purchase, while Microsoft has questioned whether Yahoo should be allowed to do a deal with Google.

Meanwhile, Yahoo CEO Jerry Yang said at the D: All Things Digital conference that his company is still talking, or rather listening, to proposals from Microsoft on something less than a full merger.

Many of those I talked to at the conference say they still expect a full merger, though plenty privately echoed Rupert Murdoch's very public puzzlement at why the two have not managed to reach an accord already.

Updated 11 p.m., with details from Microsoft's Live Search site.

REDMOND, Wash.--Microsoft is looking to buy its way into search, and I'm not talking about Yahoo.

The software maker plans on Wednesday to launch a cash back program to those who buy things after using its search.

Microsoft has details of the program up on its Web site, including a list of frequently asked questions.

"We want to earn your loyalty and reward it with cashback savings for your everyday online shopping," Microsoft said. "We are 'The Search That Pays You Back!' "

As previously reported, Microsoft is due to show off its latest enhancements to its search product at the Advance 08 advertising conference here. Microsoft Chairman Bill Gates is set to offer the main address of the event on Wednesday. I hear the company has more than just the cash back effort up its sleeves.

In any case, it's not the first time Microsoft has tried to use financial incentives to boost its search share. It has run a number of programs including its Live Search Club that offer rewards for those that use its search.

The Live Search Club effort briefly boosted Microsoft's search market share last year, but the gains have proved short lived. Microsoft has been losing ground since then and has returned to a single digit share of the market.

The news was reported earlier Tuesday by Search Engine Watch and the Seattle Post-Intelligencer.

According to the reports, Live Search Cash Back, is based on Microsoft's acquisition last year of Jellyfish, which has been piloting such a program, the reports said. Jellyfish said on its Web site Tuesday night that it was "currently offline to perform necessary service upgrades and enhancements."

Meanwhile, there's still no word on Microsoft's other, more expensive effort to buy search market share.

It's worth noting the fact that to get cash back users have to create an account and be logged in, presumably becoming a more valuable advertising customer for Microsoft as well.

Do you think this helps or hurts Microsoft's credibility when it comes to search?

REDMOND, Wash.--Republican strategist Cyrus Krohn wasn't the only elephant in the room at Microsoft's ad conference on Tuesday.

Indeed it was the other one--Yahoo--that loomed largest inside the walls of the Microsoft Conference Center. At least three Microsoft executives spoke about the company's online business but none addressed discussions with the Internet pioneer.

But with CEO Steve Ballmer dodging eggs in Europe and the heads of Microsoft's online business all gathered here, I wonder who it is that's doing the talking with Yahoo?

Well, I guess that's what having thousands of employees is good for--multitasking. I'm sure there are enough Microsoft online folks to simultaneously tell advertisers how strong its organic growth is while also talking to Yahoo to try to fix its obvious shortcomings.

REDMOND, Wash.--On the eve of Microsoft's Advance 08 advertising conference, I thought I would offer up my take on three catch phrases that I expect will come up during the two-day affair.

1. "Search should be more than 10 blue links"

This is Microsoft's typical answer to why it thinks it can still catch Google in search. The truth of the matter is that search is already more than that. There's already product search, image search, blog search, news search, academic search, medical search, and a whole assortment of specialized search types. That said, there are still plenty of times that finding what you want online is still hard.

2. "Engagement mapping"

This is a notion Microsoft has been pitching hard of late. The idea is to get advertisers to think more broadly about where their sales are coming from. The basic idea is that buyers may use search advertising to make that final click, but it is display, TV, newspaper, and other types of advertising that all contribute to that purchase. Microsoft is most interested in trying to get advertisers to spend more on display and less on search. Good luck with that one.

3. One-stop shopping

Here, Microsoft will argue it has the most to offer advertisers because it serves up the broadest range of advertising, including search, display, video, mobile and in-game advertising. That may be true, but again most of the checks are written for that first type and Microsoft is still trailing badly there.

And, then there's the word that we're all actually hoping to hear discussed--Yahoo. I, for one, am prepared to be disappointed.

Although talks have heated up again--and there is plenty of reason to think Yahoo and Microsoft will end up in each other's arms--it's likely to take beyond the close of the conference midday Wednesday for an accord to be struck.

Even if we don't get a breakthrough in Microhoo, I'm sure we'll hear lots of other phrases I haven't thought of, as well as see some new demos of where Microsoft is headed in search. I'll have on-the-spot coverage Tuesday and Wednesday, so check back here frequently.