Could Rupert Murdoch be Yahoo Inc.'s white knight?

Despite the media mogul’s claims that he isn’t interested in the Internet company, Murdoch’s News Corp. is working on a deal to merge MySpace and the rest of its Web business with Yahoo, according to people familiar with the talks.

Yahoo is furiously seeking alternatives to Microsoft Corp.'s unsolicited takeover offer. As part of the deal being discussed, Yahoo would give News Corp. a 20% stake in exchange for its Internet properties and a cash infusion that values Yahoo at about $50 billion, well above its $42-billion market valuation Wednesday.

The two companies declined to comment.


Wall Street isn’t giving much credence to this or other alternatives explored by Yahoo’s board, such as a merger with Time Warner Inc.'s AOL. Among other problems, analysts said, was that such deals would fail to help Yahoo catch up to Google Inc. in Web search or alleviate investor frustration with Yahoo’s management.

Analysts said Yahoo was courting interest from other suitors in large part to force Microsoft to sweeten its Jan. 31 offer, which was worth $44.6 billion but has since fallen with Microsoft’s stock price.

Yahoo’s board of directors met Wednesday to discuss its options, a person close to management said. The Sunnyvale, Calif.-based company then released a letter to shareholders explaining why it had rejected Microsoft’s bid on Monday, reiterating that the deal “substantially undervalues” the company.

“We remain committed to pursuing initiatives that maximize value for all our stockholders,” Chief Executive Jerry Yang wrote.


A Microsoft spokesman said the Redmond, Wash.-based company had made a “full and fair” offer. Microsoft has said it would “pursue all necessary steps” to clinch a deal, including taking the bid directly to shareholders.

The News Corp. talks began shortly after Microsoft announced its bid. Under the plan being discussed, Yang and President Sue Decker would run the combined company, which would include Yahoo, MySpace and other Web properties owned by News Corp.'s Fox Interactive Media, a person familiar with the discussions said.

Yahoo also would receive a cash infusion from an unidentified private equity fund to pay a one-time dividend to shareholders. One likely candidate is Providence Equity Partners, the private equity firm that invested in News Corp. and NBC Universal’s online video joint venture, Hulu. A representative for Providence could not be reached for comment.

The deal would help News Corp. and Yahoo battle Google’s growing dominance -- and deprive Microsoft of its best shot at catching up.


A News Corp. alliance is favored by Yahoo’s senior executives, including Yang, who wants the company to remain independent, according to people close to him.

The combined company would have a major presence on the Internet and be a force in display advertising. In addition to MySpace, Fox Interactive Media runs IGN Entertainment for video game players, FoxSports.com, Rotten Tomatoes, a website for movie buffs, and AmericanIdol.com.

Yahoo and MySpace together would reach 122.3 million Internet users, or 75% of people online, according to Nielsen Online. That would surpass Google, which attracted 117.8 million people in January.

“The Microsoft-Yahoo acquisition will, if integrated correctly, result in an audience, search and advertising powerhouse that is capable of giving Google a run for its money,” said Dan Cohen, a former Yahoo executive who is now CEO of Pageflakes.


Analysts say a Microsoft buyout still holds more appeal for shareholders. They expect Microsoft to raise its $31-a-share bid to the mid-30s.

“I wouldn’t doubt they are having discussions, but I am not sure it amounts to an alternative that’s as attractive to Yahoo shareholders as even the existing Microsoft bid, and certainly not a sweetened bid,” Stanford Group analyst Clayton Moran said.

Moran also said MySpace’s advertising partnership with Google would be a “complicating” factor to such a deal.

News Corp. had talked with Yahoo last summer about swapping MySpace, the top social-networking site, for a one-quarter stake in the combined company. Talks fell apart over the valuation of MySpace, which News Corp. is now pushing to be valued at $6 billion to $10 billion, one person said.


During a Feb. 4 conference call with analysts to discuss News Corp. earnings, Murdoch characterized the talks as loose discussions that ended with the resignation of former Yahoo CEO Terry Semel.

He also dismissed the possibility of getting into a fight with Microsoft, saying New York-based News Corp. was “definitely not going to make a bid for Yahoo.”

In fact, a News Corp. team had been working furiously on a rival proposal since the day before the conference call, on Super Bowl Sunday, according to a media-industry executive familiar with the matter.

“They actually all missed the Super Bowl,” the executive said. “They were all called back from their homes to the office to prepare for a Monday meeting with Rupert.”


Yahoo gained 31 cents to $29.88, Microsoft rose 62 cents to $28.96 and News Corp. fell 10 cents to $19.93. News Corp.'s discussions with Yahoo were first reported this week by blogs, including Silicon Alley Insider and TechCrunch.

One of Yahoo’s other options, an alliance with Mountain View, Calif.-based Google in Web search, seems to be a fading possibility. Such a deal probably would get tough scrutiny from antitrust regulators. A Google spokesman declined to comment.

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jessica.guynn@latimes.com


dawn.chmielewski@ latimes.com

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Guynn reported from San Francisco and Chmielewski from Costa Mesa.