Want to talk about massive display share? Forget Yahoo and Microsoft -- it's Yahoo and News Corp. that could shake up that world.
The two companies are discussing a deal that would make News Corp.'s Fox Interactive Media assets part of Yahoo in exchange for a 20% stake in the newly combined entity, according to a person familiar with discussions.
Right now the key for this deal is for management to test the idea with a few key shareholders to see how they would react to a potential merger -- and whether they would value the combination at $50 billion, which is the value News Corp. and Yahoo assign the deal. It's unclear at this point whether shareholders would share management's valuation estimate.
Best case, worst case
In the best case scenario, the market agrees that a Yahoo-Fox Interactive combination is worth $50 billion. In the worst case scenario, the talks put pressure on Microsoft to raise its bid to acquire Yahoo from $44.6 billion. News Corp.'s deal was first reported on blogs Silicon Alley Insider and TechCrunch and confirmed yesterday by The Wall Street Journal, which is part of News Corp.
What would such a combined entity look like? It would be a display-ad giant. According to ComScore, Yahoo has 18.8% of total display-ad impressions online, while News Corp.'s Fox Interactive, which includes MySpace, has 16.3%. Microsoft, meanwhile, serves up 6.7%. Yahoo-Fox Interactive would, however, lack the search scale of a Microsoft-Yahoo combo. According to ComScore, in December 2007, Microsoft sites accounted for 984 million U.S. searches while MySpace accounted for 342 million U.S. searches. Fox Interactive already has an ad deal with Google to provide search and other ads on MySpace; it's unclear whether a change of ownership would allow Google or Fox Interactive to end that partnership.
Yahoo desperately wants to stay independent and doing a deal with News Corp. could stave off the takeover proposed by Microsoft. Yahoo management believes it has not yet had time to prove out the strategy it has employed over the past year, as CEO Jerry Yang reiterated in a letter sent to shareholders today.
Grow its ad network
"We have a huge market opportunity -- and are uniquely positioned to capitalize on it," he wrote. "The global online advertising market is projected to grow from $45 billion in 2007 to $75 billion in 2010." He said Yahoo aims to grow its "starting points," such as e-mail and the home page, by 15% in 2007. He also emphasized the company's plans to grow its ad network, create a more friction-less marketplace through ad exchanges and open its platform to third-party developers.
On person familiar with the Yahoo-News Corp. discussions said the integration challenges that critics of a Microsoft-Yahoo merger have raised are less of a concern with a Yahoo-Fox Interactive combo. Whereas Microsoft and Yahoo have their own robust ad platforms -- and would likely fight over whose gets used if the two were combined -- Fox Interactive would be easier to plug into Yahoo's ad platform. This person said the combination of MySpace's targeting and Yahoo's behavioral data could be a huge boon.
The hand News Corp. is lending to Yahoo appears to be a reversal of CEO Rupert Murdoch's position on his Feb. 4 earnings call in which he said News Corp. is "definitely not going to make a bid for Yahoo." However, when asked of a possible linkup between the two companies, he added: "I think that has passed, but you never know."
Yahoo and News Corp. face challenges convincing shareholders that their combination is worth $50 billion. But Tim Hanlon, exec VP at Publicis Groupe's Denuo, is bullish: "For Yahoo, [it] would add a key component that Microsoft can't -- content," he said. "For News Corp., [it would add] immediate access to a wealth of web services that neither MySpace alone nor ten digital acquisitions could ever get them."