Yahoo Investor Says Microsoft Deal Makes Sense

When Microsoft told Yahoo it would "pursue all necessary steps" to ensure Yahoo shareholders knew the value of its rejected $44.6 billion offer for the embattled Internet company, the software maker implied it would pressure shareholders into a deal.

It may not have to. Bill Miller, portfolio manager for Yahoo's second-largest shareholder, Legg Mason, said it will be difficult for Yahoo to find ways to deliver more value than Microsoft would be willing to pay.

"We think this deal is a strategic imperative for MSFT, and that YHOO is in a tough spot if it wishes to remain independent," Miller wrote in a Feb. 10 note to shareholders of Legg Mason's Value Trust Fund that was obtained by eWEEK.

Miller also said what every shareholder no doubt wants to hear: that Legg Mason values Yahoo in the $40-per-share range and Microsoft will need to enhance its offer if it wants to complete a deal.

Such a statement from a corporate investor with more than 80 million shares puts pressure on both Yahoo and Microsoft. As Miller said, Microsoft will most likely have to up the ante to stay and play at the table, but for the most part it can sit and wait while Yahoo sweats.

Yahoo will have to work harder to prove it's valuable and viable enough to go it alone, or strike a deal with a white knight.

Silicon Alley Insider and TechCrunch claim Yahoo is eyeing a deal with News Corp. in which the media conglomerate would take a stake in Yahoo, which would run MySpace's parent Fox Interactive Media.

Combined with Flickr and del.icio.us, MySpace would give Yahoo quite a social networking play. Meanwhile, the Wall Street Journal claimed Google's interest in striking a deal with Yahoo is waning.

Other investors are mum on the deal thus far. Capital Research Management, Yahoo's largest investor with more than 11 percent of the company, declined to comment, as did smaller Yahoo investors Vanguard and Goldman Sachs.

Financial analysts have had nearly two weeks to dissect the deal, and most of them believe not only that the deal will happen, but that it is good for Microsoft.

Bear Stearns analyst Robert Peck said in a Feb. 13 research note that mobile Internet services and the advertising associated with it is an area that Microsoft finds attractive about Yahoo, as it looks to acquire the company and compete more effectively with Google.

"We believe Microsoft sees Yahoo's mobile advancement coupled with the future direction of Web growth as an undervalued gem in the Yahoo! portfolio," Peck wrote. "If Yahoo! can capture up to 5 percent of the mobile advertising market over the next few years, we believe it can generate up to $1 billion in additional revenues."

Peck's assessment comes one day after Yahoo displaced Google to become T-Mobile's mobile search provider in Europe and introduced its oneConnect mobile social networking service.

Brian Pitz, a Banc of America Securities analyst, said in a Feb. 5 note that the combination of Microsoft and Yahoo could eventually give Microsoft the critical mass in search it needs to compete with Google.

However, Pitz said the deal could be a distraction for Microsoft in the short term as it struggles to juggle competing with Google and integration of Yahoo's prodigious assets.