Big Yahoo shareholder urges sale of search unit to Microsoft

SAN FRANCISCO — A large Yahoo shareholder has joined a growing chorus urging the beleaguered Internet company to set aside its past differences with Microsoft and renew negotiations to sell its search operations to the spurned suitor.

In a letter sent today to Yahoo's board, Ivory Investment Management called upon the directors to make amends for "acting unreasonably" in their earlier talks with Microsoft by quickly closing a deal with the software maker now.

Ivory Investment, which owns a 1.5 percent stake in Yahoo, reasoned the Sunnyvale, Calif.-based company could persuade Microsoft to pay $15 billion for its search operations and still emerge with more earning power than it currently has.

The net result: Yahoo could nearly double its current stock price to at least $24, based on the financial assumptions made in Ivory's analysis.

Some of Ivory's math is debatable, but there is little doubt left on Wall Street that a search deal with Microsoft now appears to be Yahoo's best bet, said Stanford Group analyst Clayton Moran.

"It's a very reasonable question for Yahoo shareholders be asking right now: why the company isn't talking to Microsoft right now," Moran said. "The pressure should be mounting for them to talk because there is no good explanation for them not to be doing so at this point."

Investors reacted as if Ivory's cajoling will help bring Yahoo and Microsoft back to the bargaining table. Yahoo shares surged $1.21, or 9.9 percent, to close at $13.40 while Microsoft shares rose 1 cent to $20.61.

Yahoo spokesman Brad Williams declined to comment on Ivory's letter.

Microsoft didn't immediately respond to a request for comment, but Chief Executive Steve Ballmer reiterated last week that he remains interested in exploring a search deal with Yahoo as he tries to come up with a way to undercut Google's dominance of the online advertising market.

Although it trails Google by a wide margin, Yahoo's search engine is the Internet's second most popular, with a U.S. market share of about 20 percent, according to comScore. Microsoft's search engine ranks third at 8.5 percent.

Ballmer has maintained that Microsoft no longer is willing to buy Yahoo in its entirety — an option that was pulled off the table seven months ago when Ballmer withdrew a takeover offer of $47.5 billion, or $33 a share. Yahoo CEO Jerry Yang was holding out for $37 a share.

With Yahoo's stock in the doldrums, other shareholders besides Ivory Investment already have been lobbying for the company to reconcile with Microsoft.

Yahoo director Carl Icahn, who owns 5.5 percent of the company, has been leading the charge, and others, like Mithras Capital, also have thrown their support behind a Microsoft deal.

Last month, Yang said he is ready to talk if Microsoft wants. He made the comments shortly after Google scrapped a planned advertising partnership that Yang had been counting on to boost Yahoo's revenue by as much as $800 million annually.

Yahoo is now searching for a new CEO to replace Yang, who co-founded the company 13 years ago.

As his 18-month stint as CEO winds down, Yang is overseeing layoffs of about 1,500 employees as part of an effort to lower Yahoo's annual expenses by $400 million. Yahoo handed out pink slips to most of the affected U.S. employees today. The company also might close some of its unprofitable products during the next few weeks and shift other, less popular services into "maintenance mode," Williams said.

Yahoo also has been talking to Time Warner about a possible purchase of AOL — an idea that Ivory Investment adamantly opposed in its letter.

Ivory Investment, a hedge fund run by Curtis Macnguyen, devoted most of its letter to a detailed breakdown attempting to justify why a $15 billion sale of Yahoo's search engine to Microsoft would pay off for both sides.

The firm estimates Yahoo would lose more than $2 billion of annual revenue from the sale but would gain about $1.6 billion a year in commissions. The analysis assumes Microsoft would be able to leverage the additional search market share it would pick up from Yahoo to boost its Internet revenue by about $1 billion annually.

Associated Press reporter Andrew Vanacore contributed to this report from New York.