Yahoo Still Seeks White Knight: News Corp.’s Offer Doesn't Pencil Out, Neither Does AOL’s

At this point, everybody and their mother has looked at ways to scuttle Microsoft’s hostile bid for Yahoo: News Corp., AOL, Google, hedge funds. Even Barry Diller sniffed around (according to two sources), as did British Telecom and Asian investors. Some have put offers on the table, but none of them penciled out.

Sources tell us that News Corp. put a variety of offers on the table last Friday after weeks of negotiations, including ones involving Google, private equity funds, and even one scenario involving Microsoft as a search advertising partner. Now the latest development is that Time Warner is putting together yet another proposal to combine Yahoo with AOL. The WSJ is reporting (subscr. req.):

Yahoo and Time Warner had an earlier round of discussions, but talks intensified recently after Yahoo went back to Time Warner to ask for a proposal that it could take to Yahoo directors. Time Warner is putting the finishing touches on that proposal now. The people familiar with the matter say that the companies estimate about $1 billion in cost savings annually.

We heard some rumblings on Tuesday as well about renewed interest from AOL. But chances are this is just Yahoo scrambling to get some firm counteroffers on the table. Time Warner’s deal makers have been going through the numbers for more than a month and, one source says, could not make them work. Google already powers all of the search (and search ads) on AOL. Switching to Yahoo’s Panama would result in hundreds of millions of dollars less a year n revenues. That would put a mighty dent in that $1 billion in cost savings.

Time Warner desperately wants to salvage AOL, but merging it with Yahoo does not necessarily keep it relevant. Given its disastrous history with AOL, Wall Street may punish Time Warner if it tries to pull another Jerry Levin. Time Warner will come up with an offer, just as News Corp. did. But it is difficult for anyone to quite match Microsoft’s offer.

Yahoo can keep looking for that white knight to save it from Microsoft’s clutches, but its options are dwindling. Without Microsoft’s offer on the table, where would its stock be today? Google’s shares have gone down 20 percent since Microsoft made its bid. It is fair to assume Yahoo’s would have been hit harder. If Yahoo’s $28 stock turns into a $15 stock, then there really will be hell to pay.

Disclosure: I own Time Warner shares.