Is Yahoo a buyout candidate?

Private-equity firms and AOL are talking about making an offer, and a tricky offer it might be. Would Microsoft want to bid, too?

By Charley Blaine Oct 13, 2010 8:18PM

Updated: 11:55 a.m. ET

There must be value in Yahoo (YHOO).

AOL (AOL) and several private-equity firms are exploring the possibility of buying Yahoo, The Wall Street Journal reported Wednesday night.

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That interest -- plus the inability of anyone on Wall Street to keep a secret -- is why Yahoo shares were up nearly 10% right after the open before dropping back to a 4.9% gain gain to $16. It's the biggest gainer among Nasdaq-100 ($NDX.X) stocks today. The gain comes on top of a 5.7% gain on Wednesday. The shares had been up as much as 15% in pre-market trading.

Moreover, today's volume is huge: nearly 30 million shares by 9:55 a.m. ET. Its average volume over the last 13 weeks is 21.2 million shares.

Silver Lake Partners and Blackstone Group (BX) are among the firms that have expressed interest in either teaming up with AOL to buy the company or trying to take it private on their own, sources told the Journal.

At least two or three other firms could be interested in participating if a formal buyout proposal is drawn up, the Journal said.

Yahoo, for its part, has taken steps to defend itself against unwanted suitors. Bloomberg News said Yahoo has hired Goldman Sachs as an adviser. Goldman has been working with Yahoo for about two weeks.

The discussions -- involving private-equity firms, AOL executives and financial advisers -- are very preliminary and do not yet involve Yahoo. The conversations may not even lead to any kind of bid if only because the deal would be wildly complex, expensive and risky.

The risk starts with AOL, which spun off from Time Warner (TWX) in late 2009. It has a market capitalization of $2.68 billion, as of today's close, far smaller than Yahoo's $20.56 billion.

The Journal said officials for Yahoo and AOL declined to comment. There was no comment from Blackstone and Silver Lake either. But The New York Times said today that Blackstone has already passed on getting involved.

One scenario under discussion among the buyout firms is a complex deal in which China's Alibaba Group would buy back Yahoo's roughly 40% stake in the company, the sources said. Yahoo's stake may be worth as much as $10 billion.

Some of Yahoo's other assets would also be sold off to interested media or technology companies, and the remaining company would be of a much smaller valuation that private-equity firms could get financing for, one source said.

Another scenario involves AOL's combining its operations with Yahoo in a reverse merger after Yahoo disposes of the Alibaba stake, sources said. It is unclear whether the resulting entity would be listed publicly or taken private.

The idea first surfaced a week ago on Business Insider. The report suggested that private-equity firms had been trying to get AOL behind an AOL buyout.

It wasn't clear what price might be under discussion. And it may well be that the chatter may be only that. The Times dismissed it as simply a trial balloon. Which may be why the stock has fallen back.

And it is not clear what the reaction might be from Microsoft (MSFT).

In February 2008, Microsoft offered $31, or $44.6 billion, in cash and stock for the company. But Yahoo resisted the bid, even after Microsoft raised it to $33, or roughly $50 billion. (Microsoft owns and publishes MSN Money.)

Microsoft withdrew the bid in May 2008, and Yahoo's stock price collapsed to as low as $8.94 in fall 2008 before finally rebounding.

Since Microsoft walked away, Yahoo shares have not reached $19.18 -- the close on Jan. 31, 2008, the day before the Microsoft offer was first disclosed.

Later, the companies agreed to a 10-year deal in which Microsoft gained full access to Yahoo's search engine to be used in future Microsoft projects for its Bing search engine.

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CharleyBlainehotstocksmediastockstechnologyYahoo

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