Microsoft, Yahoo mull media partner options: sources

SAN FRANCISCO/NEW YORK (Reuters) - Microsoft Corp and Yahoo Inc have been holding separate talks with other potential media partners after their negotiations with each other broke down, sources familiar with the companies' thinking said on Wednesday.
Microsoft -- rebuffed this year in efforts to buy all of Yahoo and then just its search business -- is talking about alternative deals with Time Warner Inc, which owns AOL, and News Corp, parent of MySpace, a source close to Microsoft said, but any negotiations remain in preliminary stages.

Meanwhile, talks have continued for months between Yahoo and Time Warner over a potential merger of AOL with Yahoo to create a more formidable advertising and media player, but they are no closer to a deal, a source close to the matter said.

Shares of Yahoo jumped as much as 9 percent on Wednesday after the Wall Street Journal reported that Microsoft, positioning for a new run for Yahoo's search business, had in recent days approached media companies to join together on a deal that would effectively lead to Yahoo's breakup.

However, a Reuters source and a CNBC report, citing unnamed sources, later said there were no new talks or negotiations.

The Journal also said Microsoft met with activist investor Carl Icahn in recent days to encourage him to press his proxy battle for control of Yahoo's board, the first sign Microsoft welcomed his month-old campaign. This development also was attributed to unnamed sources familiar with the talks.

Icahn was not available to comment on the report.

Microsoft, Yahoo, Time Warner and News Corp all declined comment.

REVIVING HOPE

Wall Street analysts said the latest news revived flagging hopes among some investors that Microsoft was still interested in doing a deal with Yahoo. "The hopes that Microsoft would come back were getting crushed over the last 10 trading days," Collins Stewart analyst Sandeep Aggarwal said.

Yahoo stock ended the day up 3.4 percent at $20.88. The stock had traded as low as $19.58 on Tuesday, near its level in late January before Microsoft made its unsolicited takeover bid for Yahoo, sending the stock above $30 by mid-February.

Microsoft shares fell 3.7 percent to $25.88 on Wednesday. In the prior day's trading, Microsoft fell to two-year lows of $23.19, intraday, before recovering.

Analyst Youssef Squali of Jefferies & Co said the sharp Yahoo stock reaction was most likely a defensive move by short-sellers seeking to cover bets a Microsoft deal was off.

"Even the rumor that Microsoft is getting interested again is enough to have people to want to cover their bets against Yahoo stock," Squali said, adding that many investors have shorted Yahoo from the high $20s all the way down below $20.

Adding to the volatility were options investors who placed fresh bets Yahoo would be trading up to $27.50 by October, said analyst Rebecca Engmann Darst of Interactive Brokers Group.

THE WAITING GAME

Several financial analysts said a key detail in the Journal report was that Microsoft and Yahoo executives had sought to revisit the merger on May 17 -- two weeks after Microsoft walked away -- and that two Yahoo board members in the meeting had said they would settle for a merger worth $33-$34 a share.

On May 3, Yahoo rejected a $33-a-share Microsoft offer worth $47.5 billion, and earlier this week questioned whether the software maker was ever serious about a full-scale merger.

The source familiar with Microsoft's thinking confirmed that Yahoo had belatedly sought a deal in mid-May worth $33 to $34, but that Microsoft was no longer interested at that point.

The source said Microsoft executives considered the early May deadline as vital to winning regulatory approval before the end of the year -- when a new presidential administration arrives and months more delays would likely occur.

Microsoft also become convinced that Yahoo executives were passively resisting the deal and unwilling to seriously negotiate. Meanwhile, the economy has taken a toll on the online ad market, and with it, the value of buying Yahoo.

"Microsoft is going to let Icahn do the dirty work and hand Yahoo over to them," Jefferies & Co's Squali said, adding that it was in Microsoft's interest to hang back and let Yahoo shares settle lower as investors quit betting on a takeover premium.

In the long run, however, Microsoft needs Yahoo more than Yahoo needs Microsoft, he argued.

"Microsoft has a gaping hole in its strategy and it's called the Internet and it's only getting worse because Google is encroaching on Microsoft's business," Squali said.

Separately, the U.S. Justice Department is pursuing a formal antitrust investigation into a deal reached last month between Yahoo and Microsoft-archrival Google Inc to team up on Web search advertising.

Google, with more than 60 percent of the Web search market, and Yahoo, with 16.6 percent, agreed to a deal for Google to run search ads on Yahoo's site in a partnership that could mean $250 million to $450 million in new cash flow for Yahoo.

Google said it was confident the deal would enhance overall industry competition, but declined to discuss the probe.

Chipmaker Connects A Wireless World And Makes It Run Faster

Laptops long ago stopped needing wires to be wired.

Now televisions, digital cameras and game consoles commonly link to the world without those physical ties.

Atheros Communications (NasdaqGS:ATHR - News) is helping cut the tethers.

The Santa Clara, Calif., semiconductor company develops chips for laptops, routers and other electronics that seamlessly link them to the world.

Intel (NasdaqGS:INTC - News) still dominates the market for wireless chips in laptops and routers. Analysts say it has about 70% of the space, with companies such as Atheros and Broadcom (NasdaqGS:BRCM - News) splitting the rest.

But analysts say Atheros is chipping away there and gaining market share. And as wireless Internet connections proliferate in cell phones and game systems, Atheros chips are finding new markets.

An Atheros chip on a digital camera memory card beams the photos to computers or printers without cables.

Its chips are inside Netflix's (NasdaqGS:NFLX - News) new set-top box, which lets viewers stream movies from the Internet to their TVs.

"The game in this segment is all about bringing in innovation and bringing down the cost curve. Atheros has been good at doing that," said Adam Benjamin, a semiconductor analyst with Jefferies & Co.

Faster Connection

The semiconductor industry is transitioning from the 802.11g network standard for wireless local area networks to the next-generation 802.11n.

Those 11n chips promise huge growth for the industry, since they can potentially transmit and receive more data, faster -- critical when beaming high-definition TV and other data-rich files.

And 11g chips are still selling briskly.

Atheros has reported 11 straight quarters of double-digit year-over-year sales growth.

It had record 11g sales in the first quarter.

Most of its chips go to electronics manufacturers in Asia.

Taiwanese hardware manufacturer Hon Hai Precision Industry is its largest customer, accounting for a quarter of last year's sales.

Atheros has deals with major PC makers such as Acer, Hewlett-Packard (NYSE:HPQ - News), Lenovo and Toshiba. This month, Atheros said Advanced Micro Devices (NYSE:AMD - News) would bundle its 11n chip with some of its notebook processors.

Atheros chips were dropped recently by a major PC maker. The company didn't name it, but most analysts think it was Apple (NasdaqGS:AAPL - News).

In part because of that, as well as seasonal fluctuations, Atheros sales were flat between the first and fourth quarters.

But year-over-year sales rose 20% in the first quarter to $114.5 million. Earnings per share climbed 22% to 28 cents.

Atheros' 11g chips gained market share in wireless local area network routers, used to set up Internet hot spots and home networks.

Those 11g sales should taper off in coming years.

But sales should pick up on the higher-priced 11n chips as laptops, wireless routers and cell phones increasingly use the faster next-generation standard.

Those PC and Wi-Fi networks remain a big part of Atheros' business.

The company is also reaching into other communications technology platforms.

It's gaining bigger physical footprints within traditional laptops and wireless routers.

And it's getting into cell phones and portable game players.

"If you think that Atheros is just focused on wireless LAN, frankly we shouldn't be all that interesting to invest in," Atheros Chief Financial Officer Jack Lazar said during an investors conference. "What we're really trying to do is a variety of communications platforms that address the markets that we've already started to open up or the customers that we've already started to open up."

In 2006, Atheros bought Attansic Technology, a Taiwanese developer of ethernet integrated circuits. Last December, it bought u-Nav Microelectronics, a private developer of Global Positioning System chips and software for cell phones and other personal handsets.

Atheros internally developed its own Bluetooth products, which it started selling last year.

The company expects growth in Bluetooth, ethernet and the Global Positioning System. The mobile wireless LAN business is one of its fastest growers.

High-volume consumer items lead the way. Its chips are reaching cell phones, digital music players and other handheld electronics, as cost per chip and power consumption fall. Atheros claims more than 30 design wins for handsets.

One win is likely Nintendo's handheld DS game system, analysts say, though the company won't confirm it.

Atheros says wireless LAN chips in the unnamed game system should drive revenue in the second half of this year.

Analysts at Piper Jaffray think the deal could mean 4 million chips per quarter, at $3 to $4 each.

But Abdul Saleh, an analyst at Zacks Investment Research, thinks those games and other wireless LAN chips might not deliver much until the December quarter.

"It's probably an end-of-the-year story, rather than a second-half story," Saleh said.

So barring some big news when second-quarter results are announced next month, Saleh thinks much of those wins are already priced into the stock.

Competition And Risks

Risks exist. Purchases of wireless routers and PCs could slow. There's the chance of slower-than-expected adoption of wireless technology in handheld electronics.

Competition remains a key challenge. Atheros faces off against larger players, such as Intel , Broadcom , Texas Instruments (NYSE:TXN - News) and Marvell Technology (NasdaqGS:MRVL - News). Smaller firms include Conexant Systems (NasdaqGS:CNXTD - News).

Other competitors might arise as the handset market and the overall 11n market grow. That competition is already pushing prices lower for Atheros' legacy 11g chips, which are still more than half its sales.

Most analysts think sales and revenue should hold up. Those surveyed by Thomson Reuters project 20% top- and bottom-line boosts in the second quarter.

For the year, the consensus is for earnings per share to rise 17% in 2008 to $1.31. For 2009, analysts expect a 19% increase to $1.56.

iPhone 3G queue forms in Manhattan

The line for the Apple iPhone 3G began to form Friday--an entire week before the device goes on sale.

Frankly, one shouldn't encourage such behavior by actually covering it. But if I were in Manhattan--instead of Austin, Texas--I, too, would have interviewed them in person by now.

The queue outside of Apple's Fifth Avenue store, covered first by GearDiary and then Engadget, apparently hasn't been formed by iPhone co-dependents, though.

It is instead made up of a group of people who may want to 1) set a world's record for standing in line to buy a product and 2) have a social-agricultural-political message they want the world to hear. However, it was difficult from the video interview on Engadget to determine what the group actually stands for.

On Saturday, the Apple 2.0 blog seemed to get further with the group's agenda. The group, which started off with about 10 on Friday and was slimmed down to 5 by Saturday morning after a night of rainfall, apparently supports organic farming and sustainability for the planet. According to Apple 2.0, they may be interested in turning the White House Lawn into an organic garden and they may be planning to buy iPhones for the presidential nominees.

The seemingly ad hoc group is certainly savvy in deciding to use the iPhone 3G to garner some publicity. However, to be perfectly honestly, most mainstream journalists feel more comfortable interviewing gadget nuts rather than alternative souls hoping to use the media to change the world.