Actively managed mutual funds have done well this year, rising 9.9% through June 10, compared to the S&P 500, which was only up 5.3% over the same period (see WSJ article). This comes after a year in which the average stock fund was down 38.9%, dropping 1.9% more than the S&P 500. What is causing the out-performance? It appears to be growth stocks, which are up approximately 11% this year, compared to less than 1%gain for value stocks. Many widely-held tech stocks, such as Apple (AAPL), Cisco Systems (CSCO), Google (GOOG), Hewlett-Packard (HPQ), and Microsoft (MSFT) have helped juice returns. Nonetheless, even with the current out-performance, active funds are still losing business to index funds as investors continue to remember their poor fund performance in 2008 (really poor in some instances).

After a short hibernation, the Microsoft-Yahoo saga is back in the news (for the time being I am taking the ! off the Yahoo name given that the excitement is now gone). Per the Wall Street Journal, Microsoft and Yahoo have decided to give up their plan courtship, but of course, each leaves open the right to form some type of partnership in the future. Yahoo then went right out and got engaged to Google (which it can back out of with a change in leadership - i.e., Yahoo decides later it really prefers Microsoft).

To be honest, it is all a little boring anymore. Like many merger agreements and talks, value usually gets destroyed instead of created. This certainly seems true for Microsoft, given that Yahoo is now partnering with their main rival Google. For their troubles, Microsoft left with nothing but a bruised ego and a stronger main competitor. Microsoft stock did pop on the news, as investors were glad that the distraction was gone, at least for now. Eventually they will realize they lost this part of the Internet, and will begin scratching their heads and wondering what to do next - as well as praying that the Xbox 360 numbers are better than expected, and that Vista is not really that bad. Sigh.

Of course, Yahoo really did not fair much better. For a company that built itself on search, they have essentially farmed-out the business to their main competitor. Exactly how this is good in the long-run is difficult to understand. But as Yahoo CEO Jerry Yang mention, this will bring $800 million in annual revenue through improved monetization. No mention was made of loss of market share. Sigh.

And of course, there are the billionaires - Icahn, Pickens, and Cuban. Cuban will not get his board seat, and Icahn and Pickens, well, they will not get richer - at least not yet. I am sure they will be fine. As for the other Yahoo investors, some of which were invested through funds, well, they did not fair as well. Each may have a wait a while before seeing Yahoo at the proposed $35 a share price. Sigh.

Any winners? The same winner before everything was put into motion - Google. Without really doing too much it was able to chop a leg out from under and weaken the behemoth Microsoft, who while inept in search and the Internet, still has a lot of money to throw around. At the same time it took its next closest competitor and put a leash on it. Not bad for six months of press releases and the extension of a previous beta test agreement with a competitor.

In the end, nothing much has changed. Microsoft continues to trip over itself when it comes to the Internet, Yahoo continues to destroy value, the billionaires are still rich, small investors still absorb the lost capital, and Google continues to dominate search. Myself? I just feel a little hung-over.

Deal Journal over at the WSJ explores the valuation of various possible Microsoft, Yahoo!, News Corp, Google, AOL partnerships. Adding Google in the exercise is probably purely academic given that anti-trust regulations would preclude any potential Google-Yahoo alliance. Sanford C. Bernstein figures that a Yahoo-AOL-Google structure would increase the valuation of Yahoo! to $37.01 per share, after adding more than $550 million in earnings EBITA. Interestingly, the combined Yahoo!-AOL deal would be closer to $31.27 per share - with AOL on Google's platform - slightly north of the original offer from Microsoft. Of concern for current Yahoo! shareholders is that the terms of the AOL deal call for Yahoo! to buy back shares somewhere in the $30-40 per share range. Even with the $31 a share purchase price, the AOL dance may end up costing existing shareholders when, and if, any deal is made in the lower $30s.

Tickers: MSFT, YHOO, GOOG, TWX, NWS

As the MSFT-YHOO saga continues, it appears that more of the "strategy" is beginning to unfold. As we have discussed in other posts, the various players being talked about (News Corp, Google, Time Warner - AOL) could end up being components of any deal, but that may be secondary to the discussion. What each provides is leverage. In essence, Yahoo! wants a higher bid, but Microsoft does not want to bid against itself. Enter the new players. Without even making a real bid for Yahoo!, they give this appearance, or at least the illusion, of more value, allowing Microsoft to raise the stakes. Given recent developments, I would not be surprised to see Microsoft offer $33-35 a share, allowing everyone to be happy, go home, and avoid any more confusing partnerships - some of which may actually destroy value. The fact still remains that Microsoft needs Yahoo!, and Ballmer needs a win - all toes are too deep in the water already. The additional discussions have also given Jerry Yang the time to realize that his baby has grown up and is probably going off to college in Seattle. Always painful, but part of the process.

As was pointed out by a Bull Bear Trader reader, Google will probably be the winner in all of this. Notice that they really did not offer much, just enough to keep things interesting and honest, and more importantly, messy. I am sure they prefer two weaker search engines as competition, instead of one stronger one, but it may not matter in the end. As mention in the WSJ: "Google handily won the last phase of online competition focused on the small text ads tied to Web searches. Those ads account for roughly 40% of the U.S. online ad market." So successful is the search advertising, that even Yahoo! is farming out tasks to Google's AdSense.

Of interest in the WSJ article is how Google and its competitors are moving to display advertising, such as banner and video ads. Currently, these types of ads only account for about 30% of U.S. advertising dollars on the Internet. As viewers move from TV to the Internet, more advertising is also being placed on video sites, and sites for women's issues. Google dominates search advertising, but display advertising is still being fought over. Google's YouTube purchase, and Yahoo! recently introduced site Shine (see other posts, or http://shine.yahoo.com/), are well positioned. This is where a combined Microsoft, Yahoo!, and potential News Corp. agreement is critical. It could also allow News Corp. the opportunity to further leverage advertising at MySpace, beyond previous agreements with Google. Better opportunities (i.e. better profits) may be available, but integration will be challenging. Previous talks with partners have failed, and as mention, News Corp. may just be a secondary player in the current discussions.

Tickers: MSFT, YHOO, GOOG, TWX, NWS

It is amazing how fast things develop when it gets personal. The latest news from the WSJ reports that Yahoo! and Time Warner's AOL (which they may like to give away cheap, just to get it off the books and out of their memories) are close to a deal to combine Internet operations. Of course, Microsoft is developing its own battle plan, hooking up with News Corporation in an effort to possibly mount a joint bid for Yahoo! and its new partners - Google, AOL, .... and everyone else who hates MSFT. An interesting statement in the article is that "Microsoft and News Corp. have yet to reach an agreement on joining forces but one person apprised of the plan described the discussions as serious." Now why would the WSJ have the inside track on a possible MSFT / News Corp deal? Hmmmm.

Of interest is how AOL (aka Time Warner) would purchase shares of Yahoo! at a price above the Microsoft offering price. Essentially, AOL and some cash would come Yahoo!'s way. The deal would not include AOL's dial-up access business , and would value AOL at $10 billion (do they still have a viable dial-up business, and does anyone except the AOL dial-up or broadband folks go to the site?). Yahoo! would use the cash to buy back stock in the $30 to $40 range.

The question that gets lost in all this is whether all these partnerships are actually good for Yahoo! shareholders, or even Microsoft for that matter? Will the combined partnerships be worth more than $31 a share? Some analysts are already skeptical. Looking at the new proposed partnerships, Yahoo! seems to be getting the short end of the stick. AOL brings less to the table, other than a declining business, albeit a still significant number of eyeballs (still 4th overall with 109 million visits in February - although every time someone logs on the Internet - with either their AOL dial-up or broadband - they hit the site, even if they don't intend to, or plan to stay around). News Corp, on the other hand, brings an increasing social network to the plate with MySpace and their growing media presence.

At first blush it looks like Yahoo! is strategically placing itself in a position to command a higher bid, while Microsoft is setting up an alliance that will allow it to offer a higher bid. With a new partnership with AOL, Microsoft can rationalize a higher bid, and still save face (at least a little). In the end, everyone may realize that the $31 per share was a good price, and certainly less complicated for valuing the deal.

Tickers: MSFT, YHOO, GOOG, TWX, NWS

As reported in Bloomberg, and discussed earlier in this blog and elsewhere, Microsoft is finally putting the screws to Yahoo!, giving the search company three weeks to make a decision. Microsoft has furthered threatening to reduce its $44.6 billion offer, and, adding insult to injury, threatening to replace Yahoo!'s directors if they reject the negotiations. (As a side note: as good a businessman as Gates is/was, it is hard to image him taking this position, but it does not surprise me with Balmer - it must be the frantic "Dancing Ballmer" video that is still burned in my brain). If the negotiations break down, Microsoft will propose its own slate of directors and take the proposal directly to the Yahoo shareholders.

Once again, I think Jerry Yang has little choice, unless he can find a white knight from an ever shrinking pool. I am not sure anyone really wants to suit up to do battle against Microsoft in this case, even a somewhat weakened Google that would have too many anti-trust hurdles to jump over. Given that Microsoft took the NewCorp strategy (bid high enough - like in the WSJ acquisition - so that no one bothers to even consider stepping in the waters), also makes it unlikely that another bidder will appear.

Tickers: MSFT, YHOO, GOOG

Google may be interested in buying Skype from Ebay. Ebay initially purchased Skype as an effort to allow buyers and sellers to hook up by voice, but things never really took off. A deal would make sense given that Skype never really produced for Ebay, and Google still wants to expand into the voice space. Skype would give Google another avenue. Not sure the selling price will come close to the $3.1 billion Ebay paid back in 2005.

Tickers: GOOG, EBAY

It looks like Google CEO Eric Schmidt's promised reductions in head counts as part of the Google-DoubleClick merger may become a reality ........ on April 1st. Unfortunately, indications are that the date was not chosen in order to play a bad joke, but to push restructuring expenses off until the second quarter. With click levels down, the first quarter is already a little suspect.

Ticker: GOOG