Yahoo Hopes a Solid Profit Report Bolsters Its Leverage

Yahoo Hopes a Solid Profit Report Bolsters Its Leverage

Strong Earnings Could Increase Pressure On Microsoft to Sweeten Its Takeover Bid

By KEVIN J. DELANEY
April 21, 2008; Page B1

Yahoo Inc. will get more attention than usual when it announces earnings Tuesday, and not just from investors wondering how its revenue stacks up against Google Inc.'s strong quarter. This week's report will be an opportunity for Yahoo to try to demonstrate that it is worth more than Microsoft Corp.'s unsolicited takeover bid.
A solid earnings report could give Yahoo's board more leverage to pursue alternative paths to a takeover by Microsoft. WSJ's Kevin Delaney reports.
Yahoo's earnings announcement comes days before Microsoft reports its own earnings Thursday and Microsoft's threatened Saturday deadline for launching a hostile takeover effort.
Any big surprises from either company's financial results could alter the negotiating landscape, particularly around their standoff over Yahoo's value.
Analysts expect Yahoo to meet what they see as modest first-quarter financial projections, which the company reiterated as recently as April 7.
Google's solid earnings Thursday gave some increased confidence in those projections. Analysts say Yahoo's desire to avoid a takeover unless Microsoft raises its offer price, valued at $29.76 a share Friday, also improves the odds that it will deliver.

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"In any Internet business, you can pull the stops out in any one or two quarters," says Jeffrey Lindsay, Internet analyst with Sanford C. Bernstein. "They'd be very crazy not to." Yahoo projected first-quarter revenue of $1.68 billion to $1.84 billion, compared with $1.67 billion a year earlier.
Any solid performance by Yahoo could increase Yahoo shareholder pressure on Microsoft to raise its price. In an April 5 letter to Yahoo directors threatening to go hostile and suggesting that Microsoft would lower its offer, Microsoft Chief Executive Steve Ballmer pointed to "weakened" stock markets and economic conditions and suggested Yahoo's market share had declined.
A Microsoft spokesman declined to comment.
People familiar with the matter say the companies have met several times but haven't agreed on a framework for formal negotiations over price. Yahoo has separately been in talks with Time Warner Inc. about merging with AOL, in a deal that would give Time Warner a stake of about 20% in the merged entity. But people familiar with the matter say any agreement likely wouldn't be ready by Tuesday.
The market reaction to their earnings could also play a role in the outcome. Partly thanks to Google's earnings surprise, technology shares have rallied, with Microsoft gaining 6% last week.
That has lifted the value of Microsoft's cash-and-stock offer closer to its original $44.6 billion value when extended on Jan. 31. Based on Microsoft's $30 price in 4 p.m. Nasdaq market trading Friday, the offer was valued at $42.8 billion. Microsoft shares would have to rally about another 4% to return the bid to the original value of $31 a share.
That could make it easier to meet the expectations of some major Yahoo shareholders, some of whom have signaled they want closer to $35. A potential problem for Microsoft is that a broader rally in tech shares could embolden Yahoo to hold out for even more than a few extra dollars.
Microsoft has so far been unwilling to raise its price without entering serious negotiations with Yahoo, arguing that it has no interest in bidding against itself.
Yahoo is also expected Tuesday to face questions about results from a limited test to carry Google search advertising, part of its effort to demonstrate that the Microsoft offer undervalues it. People familiar with the matter say early results have been positive, making the test a possible prelude to a broader Google ad partnership.