All Things Digital

Desperate times call for desperate measures. And lest there be any doubt that Yahoo’s (YHOO) exploratory search-outsourcing alliance with Google (GOOG) is just that, consider this: Yahoo opposed such a partnership on Jan. 30–the day before Microsoft (MSFT) announced its bid for the company.

According to documents unsealed yesterday as part of a shareholder complaint against Yahoo, the company’s leadership felt an outsourcing deal with Google would be detrimental to Yahoo’s long-term push to become a “must buy” for advertisers.

These documents, prepared for a Jan. 30 all-hands meeting, anticipated the question of whether Yahoo would consider outsourcing search to Google. “We are focused on long-term value creation rather than short-term gains,” Yahoo said in response, adding that such a deal “may not take into account the longer-term impact on the competitive market if search becomes an effective monopoly.”

Sadly, Yahoo forgot to add a very important caveat to this statement: “When you’re not facing a hostile buyout offer from Microsoft.” Because when you are, concerns about long-term value creation and harm to the competitive market apparently cease to be an issue.

Microsoft CFO Chris Liddell said last week that “speed is of the essence” in completing a deal to buy Yahoo.

So why is it taking the company so damn long to respond to Yahoo’s latest stonewalling of its advances? Three days have passed since the expiration of Microsoft’s deadline for Yahoo to accept its buyout offer or face a possible tender offer and proxy battle. And we’ve heard not word one from Microsoft (MSFT), which had–up until Saturday–lobbed threats at Yahoo (YHOO) nearly as often as it issues security bulletins for Windows.

Well, that may soon change. People close to Microsoft tell CNBC that the software giant is girding itself for a proxy fight. And CNBC, noting a sudden upward trend in Yahoo’s share price today, speculates that Microsoft may launch its opposition slate of directors as soon as tomorrow.

Or it may not. A source with knowledge of the situation tell BoomTown that Microsoft may make good on its threat to scrap the deal. “I would not have said this yesterday,” the source said. “But I would not be surprised if they walked away rather than waged war.”

Boy, that was fast. Yahoo’s (YHOO) limited two-week test of Google’s (GOOG) AdSense for Search service has yielded wondrous results. So wondrous, in fact, that we’re only a week into it and “people familiar with the matter” are already telling The Wall Street Journal that the trial may well lead to a broader outsourcing deal between the two companies.

Five bucks and a Yahoo Insta-Yodel! says the Net portal’s having another sit-down with Microsoft this week.

Anyway, by some estimates, a deal with Google would increase Yahoo’s cash flow by more than $1 billion a year. A nice little spike in revenue like that would certainly bolster Yahoo’s efforts to spur Microsoft (MSFT) into increasing its unsolicited buyout bid for the Internet pioneer. That being the case, why didn’t Yahoo forge such a partnership with Google last July when it was restructuring the company’s “ecosystem” and slaughtering sacred cows? Perhaps government approval was a concern?

It’s never wise to take an unsolicited buyer’s first offer. But if Yahoo’s waiting for Microsoft to raise its original $31-a-share bid for the company, it’s going to be waiting a long time. Microsoft (MSFT) may be cash-rich and debt-free enough to pay a 62% premium for a declining Internet major. It may be desperate to narrow Google’s lead in the online advertising market. But it’s not certifiable. And it would have to be to offer Yahoo (YHOO) the $40-a-share for which the company’s rumored to be angling–a bid that would be a 109% premium over the $19.18 closing price of Yahoo shares the day before the original offer was announced. Yahoo has about as much chance of getting a $40-a-share offer out of Microsoft as it does reclaiming its long-lost lead in the search market from Google. Just ask Bill Gates.

Interviewed this morning about whether Microsoft was haggling with Yahoo over its rejected hostile buyout, Chairman Bill Gates said that was not the case and gave no indication that the software giant was willing to up its bid. “We sent them a letter and said we think that’s a fair offer,” Gates told the Associated Press. “There’s nothing that’s gone on other than us stating that we think it’s a fair offer. They should take a hard look at it.”

Gates’s comments come amid reports that Microsoft will authorize a proxy fight for Yahoo this week–a move that will cost it quite a bit less than raising its current offer, which would require an additional $1.4 billion for every dollar added.

Looks like the leveraged-buyout market isn’t as lousy as you’d think. This morning 3Com agreed to be acquired by private-equity firm Bain Capital Partners LLC for about $2.2 billion in cash. As part of the deal, which is to close in the first quarter, Chinese networking giant Huawei Technologies will take a minority stake of 10% in 3Com. “The 3Com board of directors and senior management team have thoroughly reviewed our strategic alternatives and have determined that the agreement with Bain Capital provides the best value for 3Com shareholders,” said Edgar Masri, 3Com’s chief executive officer. “We believe that this agreement better positions 3Com to establish itself as a global networking leader, which will benefit our employees, our customers and our partners.”

Don’t forget shareholders. 3Com’s stock spiked on news of the deal, sending it upward 36%, or $1.33, to $5.01, in morning trading.

For 3Com, the deal is another turn in its byzantine relationship with Huawei. In November 2003, the two companies allied to found router and switch manufacturer Huawei-3Com. Then, in March of this year, 3Com paid $882 million to buy Huawei out of the joint venture. Now Huawei’s got a minority stake in 3Com that may well increase over time. Could end up that China’s fast-growing networking-equipment vendor will end up controlling 3Com after all …

I’m worried, Larry … I think it’s imperative that we start to budget and plan.”

–Oracle CEO Larry Ellison’s accountant Philip Simon

Looks like Larry Ellison’s long-suffering accountant won’t have to reach for the Mylanta next time the mercurial CEO maxes out his more-than-a-billion-dollar credit limit. Yesterday Oracle reported surprisingly strong growth in what is traditionally its weakest quarter of the year. The company’s fiscal first-quarter profit grew 25%, easily besting Wall Street analysts’ expectations. This despite the summer’s nauseating market turbulence. And according to Ellison, this kind of financial success isn’t an anomaly, but a trend and one that will continue to keep Oracle growing faster than competitors like IBM.

“We’re doing very well against them,” Ellison said, referring to IBM.

So well, in fact, that it’s threatening to overtake the company as the No. 2 middleware provider.

“We’re growing dramatically faster than our competitors, and our target really is to beat IBM,” Ellison said. “If we maintain our trajectory and IBM maintains their trajectory, we could pass them as early as the end of this year or certainly next year to be the No. 2 player in middleware.”

Given the criticism leveled at Vodafone following its failed 2004 bid for AT&T Wireless, it’s of little surpise that the company is vehemently denying reports that have it mulling a $160 billion offer for Verizon Communications.

Vodafone claims it has “no plans” to make such an offer. But as Sony president Ryoji Chubachi can attest, “no plans” can mean any number of things–perhaps even “carefully scripted leveraged buyout.” Certainly, Vodafone has to have kicked the idea around in the past. Acquiring Verizon Communications would give it full control of the telecom companies’ jointly held Verizon Wireless venture. And at the near-bargain basement price of $160 billion–after all, the American dollar has fallen to a 26-year low against the British pound. “Sure, $160 billion is a huge amount, but it’s not nearly as big as it used to be–if you’re paying in British pounds,” ZDnet’s Larry Dignan writes. “The dollar is a downtrodden currency these days. And Vodafone reports its financials in the pound. A Vodafone acquisition of Verizon is the equivalent of a Londoner taking a vacation in the U.S.–it’s a bargain.”