News Corp. may join Microsoft in Yahoo bid

With web services giant Yahoo continuing to resist its acquisition overtures, Microsoft has reportedly entered talks with Rupert Murdoch's News Corp. in an effort to bolster its bid and exert even greater pressure on Yahoo and its shareholders. Citing sources actively involved in the discussions, The New York Times reports Microsoft and News Corp. are presently in the early stages of negotiations, but should News Corp. agree to throw its weight behind the software behemoth's offer, Microsoft could raise its current $44.6 billion bid, further weakening Yahoo's position. A Microsoft/News Corp. deal would also remove one of Yahoo's most viable escape routes: In mid-February, The Wall Street Journal reported Yahoo was negotiating with News Corp. to combine social networking site MySpace and related Murdoch-owned digital properties in exchange for at least a 20 percent Yahoo stake that would enable the company to ward off Microsoft's advances and remain independent.

According to Fortune, Yahoo is also stepping up its search for a white knight, closing in on a deal with fellow web services giant AOL to combine operations. Fortune reports that parent Time Warner would fold AOL into Yahoo and make a cash investment equaling 20 percent of the combined company. In return, Yahoo would agree to repurchase several billions of its shares in the mid-$30 range. In addition, Yahoo on Wednesday announced it will outsource advertising space to fellow search kingpin Google as part of a short-term deal that could lead to a more expansive partnership. Microsoft general counsel Brad Smith has already suggested a formal Yahoo-Google partnership would be anticompetitive, and Sen. Herb Kohl (D-Wisconsin), chairman of the Senate Judiciary Committee's antitrust subcommittee, has gone on record saying he will be "following closely."

However, many industry pundits continue to argue that accepting Microsoft's bid makes the most sense for Yahoo's immediate future. "We continue to believe reaching a mutual agreement with Microsoft would be the best way for Yahoo to potentially extract a higher bid," wrote UBS analyst Ben Schacter in a note Wednesday. "The alternative would be for Yahoo shareholders to tender, although this process would not be as expeditious as if the two sides were to come to terms, and could involve a lower offer price, making the battle potentially even more protracted."

For more on the Microsoft/News Corp. negotiations:
- read this New York Times article

For more on the Yahoo/AOL negotiations:
- read this Fortune article

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