All Things Digital

If, as Carl Icahn claimed this morning, Yahoo’s board has acted irrationally and lost the faith of shareholders, the Internet company apparently sees no point in acting rationally to regain it. In a letter to the investor-agitator, Yahoo (YHOO) Chairman Roy Bostock dismissed Icahn’s threat of a proxy battle nearly as brusquely as it turned away Microsoft (MSFT) (the press release bullet alerts below summarize the letter quite nicely).

According to Bostock and Co., Icahn just doesn’t get it (and, to be fair, there are some who agree). “Your letter reflects a significant misunderstanding of the facts about the Microsoft proposal and the diligence with which our board evaluated and responded to that proposal,” Bostock wrote. “A fair-minded review of the factual record leads to one conclusion: that Yahoo’s 10-member board, comprised of nine independent directors along with Yahoo CEO Jerry Yang, remains the best and most qualified group to maximize value for all Yahoo stockholders. Conversely, we do not believe it is in the best interests of Yahoo stockholders to allow you and your hand-picked nominees to take control of Yahoo for the express purpose of trying to force a sale of Yahoo! to a formerly interested buyer who has publicly stated that they have moved on. Please may I remind you that there is currently no acquisition offer on the table from that company or any other party.”

Well, no acquisition offer that Bostock knows of, anyway. Microsoft may not be finished with Yahoo yet. “We think Microsoft may still be interested [in Yahoo] as, in our view, it needs Yahoo to compete vs. Google,” wrote UBS analyst Ben Schachter in a research note today. “We continue to think a deal will be reached.”

Hewlett-Packard’s (HPQ) acquisition of technology services giant Electronic Data Systems Corp. (EDS) will be the company’s largest acquisition since the $20 billion merger former HP CEO Carly Fiorina orchestrated with Compaq Computers six years ago.

Hopefully, it won’t be nearly as rancorous.

Valued at $13.9 billion, or $25 per share, the deal will more than double the size of HP’s consulting and outsourcing business. It will likely do the same to the $16.6 billion in revenue from services the company made in 2007 as well.

When the dust has settled around the merger, HP will be the second-largest provider of consulting and outsourcing services, behind IBM (IBM). But it will take some doing to get there. “It’s a very significant combination,” said Ben Pring, a research vice president in the IT Practices Group at Gartner (IT). “[But] people who are skeptical of big integrations will have a field day around this. It’s putting together two large businesses with two different heritages. It’s going to be a big culture clash.”

But if HP manages to pull it off? Well, as Fiorina would likely tell you, bigger is better if you can do it right.

“It’s somewhat amusing because we’ve seen this play before. I think this is sort of further evidence that HP really does see value at scale basically, at size,” said Illuminata analyst Gordon Haff. “One of the things we’ve seen very clearly over the last couple years is that Carly really had the right idea, she just couldn’t execute on it. She wasn’t wrong for saying HP needed to be bigger, effectively,” said Haff. “If (the merger) does go through we’re going to end up with an HP that looks a lot like Carly wanted it to look.”

A Blockbuster (BBI) acquisition of Circuit City (CC) may not be as much of a long shot as it first appeared. This morning the electronics chain, which has been vocal in its skepticism of Blockbuster’s ability to finance such a deal, finally opened its books to the video rental outfit.

Why the sudden turnabout? Two words: Carl. Icahn. Apparently, the billionaire investor–Blockbuster’s largest shareholder–has promised to purchase Circuit City if Blockbuster is unable to finance the $1.3 billion deal. In a statement, Circuit City Chairman and CEO Philip Schoonover made it quite clear that Icahn is about the only thing Blockbuster has going for it in this particular gambit and cautioned against reading too much into the sudden opening of its books. “While the Circuit City board has confidence in the company’s ability to successfully implement its turnaround plan and generate shareholder value, we believe that we can best serve the interests of our shareholders by exploring all possible alternatives to enhance shareholder value,” Schoonover said. “Let me be clear that our decision to allow Blockbuster and Carl Icahn to conduct due diligence should not be taken as an indication that the board has completed its review of the Blockbuster proposal, that the board has taken a position on the company’s value or that it has settled upon a particular strategic course of action.”

Not yet, at least. In that same statement, the retail chain said it has hired Goldman Sachs & Co. to explore strategic alternatives, which may include a sale of the company. Seems Circuit City’s board may not have as much confidence in the retailer’s turnaround plan as Schoonover would suggest. And why should it? Circuit City has been posting losses amid declining sales for some time now. And though it has restructured itself a bit, it continues to hemorrhage market share to Best Buy and Wal-Mart et al. That said, selling itself to another struggling company with an outdated business model hardly seems a good solution to such problems. It’s like two drunks propping each other up on the dance floor.

To some, Sprint’s longstanding reputation for lousy customer service, poor network coverage, high churn and Keystone Kops-style management disorganization might be a bit–how can I put this delicately–off-putting. The beleaguered company’s subscriber numbers are dropping like failed calls, as are its shares. Sprint’s stock price has fallen nearly 60% over the past 12 months. It posted a $29.6 billion loss for 2007 and has had its debt rating cut to junk by Standard & Poor’s.

Not the most attractive of acquisition targets. But beauty is in the eye of the beholder, in this case T-Mobile parent Deutsche Telekom (DT) which is reportedly considering a bid for the wireless outfit, whose worsening losses have left it ripe for a buyout. By swallowing Sprint (S), DT could gain some spectrum in the States and stave off a price war between the mobile carriers, or so the “thinking” goes.

Thing is, an acquisition of Sprint entails an acquisition of Sprint’s problems–and there are many. It would also require DT, which operates a GSM/EDGE network, to manage Sprint’s 3G CDMA network and Nextel’s legacy iDEN system. That’s three different network standards. And then there’s Sprint’s WiMax operation, XHOM, to deal with. That’s the makings of a real Greek tragedy of a business story right there. Said Avian Securities analyst Matthew Thornton, “While the differing network technology standard does not necessarily eliminate the possibility of a deal, it does significantly raise the costs and complexity of the combination.”

Michael Nelson, an analyst at Stanford Group, agreed. “You really cannot underestimate the level of complexity that that entails,” he told Bloomberg. “There is a significant amount of integration risk.”

Microsoft’s walked. As first reported by BoomTown, Microsoft (MSFT), which had threatened to abandon its hostile bid for Yahoo (YHOO) a number of times over the past month, did just that on Saturday.

The company confirmed to BoomTown that merger talks with Yahoo, which began in earnest Friday, collapsed Saturday afternoon when they could not agree on a price. Sources tell BoomTown that Yahoo, which had been demanding $40 a share for a friendly deal, recently lowered that price to $37. To Microsoft, however, that price was just another of Yahoo’s “unrealistic expectations.” Unwilling to meet it, it held firm at $33. End result: no deal.

“We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners,” Ballmer said in a letter to Yang. “I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table. But clearly a deal is not to be.”

Ballmer also said that Microsoft has no plans to take Yahoo to the mat in a proxy fight. “Also, after giving this week’s conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders,” Ballmer stated. “This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft. … Your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!.”

So … any bets on how long it will take Yahoo shares to hit a new 52-week low on Monday?

“We oughta know something–we oughta announce something in very short order,” Microsoft (MSFT) CEO Steve Ballmer said of the company’s acquisition standoff with Yahoo (YHOO) this morning.

Apparently in Ballmerese “short order” means “at some indeterminate point in the future,” because here we are at close of business and the company hasn’t announced anything except that it plans for an announcement. “With the right circumstances, it’ll happen,” Ballmer told The Wall Street Journal. “Without the right circumstances it won’t happen.”

“We know what Yahoo’s worth,” Microsoft CEO Steve Ballmer said last week. “$44 billion is a lot of money.”

But it’s not as much as $46 billion, which may be what Microsoft (MSFT) feels Yahoo (YHOO) is worth today. “People familiar with the matter,” who are no doubt collecting a Microsoft paycheck, tell The Wall Street Journal that Microsoft’s board of directors is meeting today to plot the company’s next move in its ridiculously prolonged acquisition standoff with Yahoo. Among the options the board is considering: sweetening Microsoft’s bid to as much as $32 or $33 a share. Which is $2 or $3 less than the figure Yahoo’s major shareholders are said to be seeking.

Apple (AAPL) has finally found a worthy use for the more than $18 billion in cash and short-term securities gathering dust on its balance sheet. The company’s acquiring P.A. Semi for about $278 million in cash.

A boutique semiconductor design company, P.A. Semi specializes in super-low power PowerPC processors. It boasts a rock-star design team littered with Itanium, Opteron and UltraSparc veterans, led by Dan Dobberpuhl, who was among the lead designers on Digital Equipment’s Alpha and StrongARM chips. And in February of 2007, P.A. Semi uncrated its PWRficient 64-bit multicore processors, 2-gigahertz ARM chips that consume just 5 to 13 watts of power, making them 300% more efficient than any comparable chip.

An impressive chip. Question is, what does Apple want with the impressive little chip shop that made it? Perhaps the same thing it was looking for in 2005 when it first approached the company about a supply deal. That agreement never panned out and Apple subsequently signed up with Intel (INTC) and made transition to X86 chips. The switch has gone well. So well, that it seemed almost a foregone conclusion that Intel’s new line of Atom processors would end up in everything from the next generation iPhone to that mythical iTablet, Apple gaming console and next-gen Newton.

But perhaps that’s not the case. Perhaps Atom’s not quite to Apple’s liking? Perhaps, as word on the street has it, it failed to produce the kind of battery life that Apple wants for its ultra-portable designs. Perhaps Apple just wants its own in-house processor design team, one it could use to push its own technical innovations into the market.

Or perhaps P.A. Semi’s working on a new chip so insanely great that Apple CEO Steve Jobs felt compelled to acquire the company? More to follow when Apple reports earnings later today.