Despite all the rumored interest in Yahoo Inc, progress on a deal has hit a brick wall mainly due to the company's lack of strategy and restrictive confidentiality agreement, people familiar with the situation said.
Most of the private equity firms and strategic buyers considering a bid for the Internet giant have still not looked at the financial documents Yahoo began circulating two weeks ago because the confidentiality agreement, once signed, restricts their ability to form consortiums, these people said.
It's a stalemate, said one source familiar with the process, referring to the standoff taking place between Yahoo and its suitors.
According to the sources, private equity buyers are holding off on signing the agreement because they want to explore potential partnerships before committing to the nondisclosure.
Bidders also want to first figure out the plans of Alibaba and Softbank Corp -- Yahoo's joint venture partners in Asia -- as well as Microsoft, which is participating in deal discussions in part to protect its interest in a 10-year Internet search partnership it struck with Yahoo in 2009.
Private equity firms are not signing up; they want to wait and see what the structure looks like that Jack Ma and Masayoshi Son put together, said a second person close to the situation, referring to the Alibaba and Softbank founders.
Everyone is also waiting for what the independent directors want, either to sell as a whole or in pieces, this person said.
It is also seen as a half-hearted auction, with various Yahoo board members having differing views on whether to sell the company at all, said two sources close to the process.
Yahoo said the board is conducting a comprehensive strategic review to return Yahoo to growth and will take the time it needs to select the best approach for the company and the shareholders. It declined to elaborate.
Yahoo advisers Goldman Sachs and Allen & Co informed interested parties last week of a no cross talk provision, which is part of a nondisclosure agreement that they have to sign to gain access to sensitive financial information about the company.
Among the parties interested in Yahoo are Silver Lake, TPG Capital, Bain Capital, Blackstone, Kohlberg Kravis Roberts, Providence Equity Partners, Hellman & Friedman, Carlyle Group, and Russian technology investment firm DST Global, according to several people familiar with the matter.
Google Inc is also taking part in the still-developing discussions surrounding Yahoo, two sources added.
A deal for Yahoo, which has a market value of more than $20 billion, would be both rich and complicated. Given the poor credit markets, a club deal involving two or more private equity firms and cash from a strategic player such as Microsoft is seen as necessary to finance a deal, sources said.
Consortiums are forming and breaking up and then reforming, a third source close to the situation said. It's a very fluid situation. It's moving around and everybody is trying to figure out what the right way to maximize value out of the structure is here.
EVERYTHING RUNS THROUGH ALIBABA
Alibaba, the Chinese e-commerce giant in which Yahoo has a 40 percent stake, has publicly expressed interest in buying all or part of Yahoo.
Since its 40 percent stake in Alibaba represents a substantial part of Yahoo's value, the Chinese e-commerce giant is an essential player in any deal. As a result, Alibaba is expected to start fielding inquiries from private equity firms that have reached out to the company about its interest in partnering, according to the people familiar with the matter.
If Yahoo elects to sell its 40 percent stake to a third party, Alibaba has the right of first refusal to buy it back with the same terms offered to the outside party.
That same condition applies to Yahoo's 35 percent stake in Yahoo Japan, its joint venture with Softbank.
The right of first refusal means buyout firms must woo Yahoo's joint venture partners in Asia before they can do anything with Yahoo.
There is a big value disconnect between Yahoo's Asian and U.S. operations, and the challenging part of a deal is figuring out how to separate these businesses and unlock value without incurring heavy taxes, said people familiar with the situation said.
For instance, one Wall Street analyst recently valued Yahoo at just over $20 billion, with its core search and display advertising business worth $7.7 billion, its Asian assets worth $9.2 billion, plus $3.2 billion in cash.
For its part, Yahoo's independent directors have yet to decide whether to sell the company at all, or if it should sell it as a whole or in pieces. Moreover, former Yahoo CEO and founder Jerry Yang is interested in taking the company private himself with the backing of private equity, people familiar with the situation have said.
Speaking at an industry event last week, Alibaba CEO Jack Ma reiterated his interest in buying Yahoo.
We keep our strong interest on Yahoo, Ma said at an AllThingsD event in Hong Kong last week. We are waiting for the Yahoo board, and especially their independent directors, to tell us what exactly they want to do.
Asked if Alibaba would be heavily involved in any deals involving Yahoo, Ma said: Definitely, we are the main driving force. And we want to be the main driving force, and we want to do this thing as a partner-like thing.