Microsoft may lose patience; could cut bid for Yahoo: Reports

Mumbai: Microsoft could be re-evaluating its bid for Yahoo Inc., given that the Internet portal could have dropped in value since Microsoft made its offer on 1 February, in part because of the slowdown in the US economy.

Microsoft is reported to be mulling alternative tactics to Yahoo!'s non – cooperation thus far with its offer, including negotiations that have not gone anywhere. Moreover, a lower bid could pressurise CEO Jerry Yang, who was looking for alternatives because he opined that Microsoft's bid undervalued the company. However, since 1 February, when Microsoft first announced its bid to acquire Yahoo! at $31 a share, Fed chairman Ben Bernanke has said that the US could be in the midst of a recession, post the losses coming from the collapse of the subprime mortgage market.

Analysts predict that Yahoo!'s best bet would be to initiate friendly negotiations with Microsoft, as they expect the broad based internet portal to perform in line with its peers. Also, the economic impact shrinking Yahoo!'s value does not help the company prolong the agony for Microsoft.

Yahoo had already rejected Microsoft's offer as being severely undervaluing its assets and future growth prospects (See:Yahoo plans alternatives as board weighs Microsoft offer). In an investor presentation filed with the US Securities and Exchange Commission, Yahoo said that it ''provides meaningful strategic value and warrants a significant acquisition premium above its equity value''.

Microsoft's bid is now valued at $42 billion, down from the $44.6 billion on 1 February, 2008, on account of the macro-economic impact. Sources say that given the overall decline in the market, the premium that Microsoft is offering for Yahoo! Has now become inflated, and it would come as no surprise if Microsoft waters down its bid to more realistic levels.

After eight straight quarters of declining profit numbers, analysts see Yahoo! Going no where, and would like to see Microsoft take it over. Yahoo! On the other hand expects sales to climb by 20 per cent each year over the next two years, and says that this could be even higher than analysts estimate, which is why Microsoft's offer undervalues the company. Analysts consider Yahoo!'s 20 per cent prediction ''too bullish''.

Microsoft's bid for Yahoo is widely seen as an attempt to take on Google and its online search and paid advertising business, which has no credible competitor other than Yahoo! Even then, the gap between Yahoo!'s online search advertising and Google's market share is so wide that the unified entity would barely cause a dent in the latter's revenues or market share.

Microsoft, according to industry sources, could take any one of three courses of action, which include launching a proxy war, lowering its bid for the internet giant, or simply walk away from the deal. As time progresses, Microsoft's patience will start to wear thin, and that will start to close options for Yahoo!'s management, who has so far ''refused to engage'' in negotiations.