Microsoft to Yahoo: Time Is Ticking

Earnings Report Includes Reminder of Saturday Deadline for Buyout Offer

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NEW YORK ( -- Memo from Microsoft: That deadline is still Saturday, Yahoo.

Microsoft, reporting its fiscal year third-quarter earnings, reiterated that it has set a cutoff date for a Yahoo merger and that if progress in a deal to combine the two companies isn't made by this weekend, it could either withdraw its offer or initiate a hostile takeover.

"We've been clear speed is of the essence. ... Unfortunately, the transaction has been anything but speedy and characterized by what would appear to be unrealistic expectations of value," Chief Financial Officer Chris Liddell said. He said Microsoft has yet to see tangible evidence that its bid undervalues Yahoo.

On April 5, Microsoft CEO Steve Ballmer sent a sternly worded letter to Yahoo's board of directors warning that if a deal were not negotiated within three weeks, he would nominate an alternative slate of directors and put the decision in Yahoo shareholders' hands. Yahoo, for its part, maintains that Microsoft's half-cash-half-stock offer, which was originally $31 a share but has dropped due a decline in Microsoft's stock price, undervalues its business.

Ready to negotiate?
In the question-and-answer portion of the earnings call, Mr. Liddell said Microsoft had been slower to buy back stock this quarter in order to maintain as much flexibility as possible in terms of cash buildup as he wasn't sure how the Yahoo transaction could shake out. That sentiment suggests Microsoft could be open to sweetening its Yahoo offer by making more of it cash.

While few believe Microsoft will actually back down from its offer to buy Yahoo, Microsoft is certainly hinting as much. Mr. Liddell, echoing comments Mr. Ballmer made earlier this week in speeches in Europe, said that Microsoft could withdraw its proposal and focus on other opportunities, including organic ones. He said the company would provide updates next week.

"With or without a Yahoo combination, Microsoft is focused on the online advertising market, which is expected to double to $80 billion by 2010," Mr. Liddell said.

The company cited three priorities in terms of building organic growth: to drive innovation in search; drive innovation in advertising; and grow user engagement across MSN and Windows Live properties.

Net income declines
Microsoft's net income for fiscal third quarter was $4.38 billion, or 47 cents a share, down 11% from $4.93 billion, or 50 cents a share, for the year-earlier period. Earnings failed to meet analyst expectations.

Microsoft's online-services division, which includes all of its online ad sales, the MSN portal and Windows Live, earned $843 million, up 40% from the $603 million generated over the same period a year ago. Excluding revenue from aQuantive, online ad revenue is up 29% year over year. However, the operating loss of the division widened 33% to $228 million.

The brightest spot in the company was its entertainment and devices division, which turned a profit for the third consecutive quarter, riding on strong sales of the Xbox 360.
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