Coverage: Microsoft in talks to buy Yahoo’s core business

After two failed attempts in the past, Microsoft might take a third stab at acquiring part of struggling tech giant Yahoo.

The news comes just days after activist investor Starboard Value announced its intentions to have the entire Yahoo board overthrown.

Sarah McBride of Reuters had the weekend’s news:

Microsoft Corp executives are in early talks with potential Yahoo Inc investors about contributing to financing to buy the troubled Internet company, a person familiar with the situation said.

The talks are preliminary, the person added, and Microsoft is focused on preserving the relationship between the two companies. Microsoft and Yahoo have longstanding search and advertising agreements.

Private equity firms interested in Yahoo approached Microsoft, the person added. Microsoft declined to comment.

Yahoo is auctioning its core Internet business, which includes search, mail and news sites. The faded Internet pioneer has been struggling to keep up with Alphabet Inc’s Google and Facebook Inc in the battle for online advertisers.

Verizon’s Chief Financial Officer Fran Shammo said in December that the U.S. wireless carrier could look at buying Yahoo’s core business if it was a good fit.

Matthew Ingram of Fortune explained what has brought Yahoo to its current point:

Yahoo’s turmoil has been largely under the surface for the past few months while it moved to consider bids for its core assets. But now the battle for the company’s future has come to a head, with activist investor Starboard moving to replace the entire board of directors.

As Yahoo CEO Marissa Mayer fights to retain control over the company and dictate the terms of its eventual breakup or sale, a familiar name has appeared: Microsoft. According to a report from tech news site Re/code, the software giant has offered behind the scenes to a number of private equity firms that it would be willing to finance some or all of any bid they make for Yahoo’s business.

The fact that Yahoo will be broken into pieces or sold off wholesale isn’t really in doubt at this point. The board finally agreed to start taking official offers in February, after pressure from Starboard and others based on the decline in the company’s stock price, and now the activist investor has its sights set on a proxy fight.

Starboard says that it has lost confidence in Mayer and the board, and that new management is needed to bring “credibility to a process that has been publicly criticized repeatedly for being too slow, fraught with conflicts of interest and very difficult for highly qualified and motivated strategic and financial buyers to access much-needed diligence information.”

In a very real sense, Yahoo has been a dead man walking for some time, at least as far as the stock market is concerned. Its most valuable assets are the stakes that it owns in the holding company of Chinese e-commerce giant Alibaba and Yahoo Japan, which are together worth about $30 billion. If you do the math, based on Yahoo’s current market capitalization of about $32 billion, that means Yahoo’s actual core businesses are being valued by investors at next to nothing.

Yahoo is still hoping to get something from the sale of its core assets, however, which is what the auction process is all about. According to a number of reports, the company is hoping to get as much as $10 billion for its search, advertising and editorial operations, although some analysts believe they may only be worth about half that amount.

Kara Swisher of Re/code discussed the legitimacy of a Microsoft-Yahoo deal:

Every single possible buyer I have spoken to this week agreed in spades, with many calling the Yahoo sale effort a farce. The current Yahoo board has said it is not, but the credibility of the current Yahoo board is — let’s be honest — under some much-deserved scrutiny.

In any case, adding Microsoft into the mix does give this process some seriousness. Microsoft’s partnerships and acquisition strategy head Peggy Johnson is part of the effort, as well as others at Microsoft, sources said (you can hear my Re/code Decode podcast interview with her from last fall below).

To be clear, the software giant has made no commitments so far to any investors, and any discussions now are exploratory. But sources said that the reason for providing financing would be because Microsoft wants to ensure that if Yahoo is sold, whoever buys it will be a good partner going forward. That makes sense, since Microsoft has close search and advertising ties with Yahoo, part of a longtime partnership.

That deal was struck after Microsoft made a hostile bid to buy Yahoo in 2008. At the time, former CEO Steve Ballmer offered $31 a share; at that time it was worth about $45 billion.

Ultimately, the effort was unsuccessful, but it was ugly by more friendly tech standards.

Since then, the companies have had a more cooperative relationship, although there was some recent tension when Mayer tried to get out of parts of the current search deal via a lawsuit that failed. She ended up renegotiating the deal a year ago on more favorable terms for Yahoo and later signed another search deal with Google, too.

Preserving its current status is important to Microsoft, said sources, which is why it has been mulling the financing of possible Yahoo buyers, who will have to come up with billions of dollars in cash to be competitive. “If Microsoft put in a billion, it would cost them almost nothing,” said one investor who had spoken to the company. “It’s a minor thing and it buys them a lot.”