French Efforts to Block Stake Sale of Start-Up to Yahoo Is Criticized

The government of President François Hollande has expressed its objections to plans by Yahoo to buy a controlling stake in the video-sharing site DailyMotion, which is owned by France Télécom, in an effort to keep one of the country’s most successful technology start-ups out of foreign hands.

The move has probably scuttled any hope of an agreement, according to two people briefed on the situation, who spoke Wednesday on condition of anonymity.

The government’s intervention has alarmed entrepreneurs in France, who say it sends a bad message to foreign investors, especially at a time when the country is seeking their money to help jump-start its economy.

“I’m sure France will be downgraded in foreign investors’ eyes because they will think it is too complicated,” said Frédéric Montagnon, co-founder of OverBlog, a blogging platform.

DailyMotion, which was created in 2005 by private investors in a Paris apartment, was effectively selected to be a French national champion in 2009, when the country’s strategic investment fund pumped 7.5 million euros into the company. Later, DailyMotion was taken over by Orange, a subsidiary of France Télécom, a former state-owned monopoly in which the French government wields considerable influence because it still holds a 27 percent stake.

Stéphane Richard, the chief executive of France Télécom, has said on several occasions that he was interested in finding a partner, preferably an American technology company, to help DailyMotion expand internationally.

DailyMotion has an audience of more than 110 million unique visitors a month, making it the 12th largest online video site in the world, according to comScore, a research firm. But it has struggled to compete with the giants of the business, including YouTube, which is owned by Google, for advertising revenue.

Yahoo has also been trying to expand its video presence under the leadership of Marissa Mayer, the chief executive it hired away from Google last year. A few months ago, Yahoo began talks with France Télécom on a deal under which it would have taken control of DailyMotion, according to people briefed on the negotiations. Yahoo was apparently interested in buying at least a 75 percent stake, in a deal that would have valued DailyMotion at more than 200 million euros, these people said.

The French government apparently favored an arrangement under which France Télécom would have retained control. Word of its objections leaked to the French news media last week.

Late Wednesday, Arnaud Montebourg, France’s minister for industrial renewal, acknowledged that the negotiations had broken down, saying he “regrets that the talks were unable to achieve an agreement satisfactory to all the parties involved.” While neither Yahoo nor France Télécom has publicly disclosed that they were conducting talks, Mr. Montebourg showed no such reluctance.

“The minister has expressed his desire that a partnership between Yahoo and Orange should be built on an equal base, mutually beneficial to both companies,” his office said in a statement.

One person close to Mr. Montebourg, speaking on condition of anonymity, said he thought there was still a possibility that the talks could be revived. But another person briefed on the situation said that Yahoo had walked away and was unlikely to come back. Yahoo declined to comment.

The move to block a takeover by Yahoo comes even as France has been stepping up its efforts to attract foreign investment â€" much needed, analysts say, to pull the country out of a slump in which gross domestic product declined by 0.3 percent in the fourth quarter of last year.

Under the tag line “Say oui to France,” government agencies have been running advertisements in American newspapers promoting French “innovation clusters,” tax credits for research and entrepreneurial spirit.

According to the Organization for Economic Cooperation and Development, France received $62 billion of foreign direct investment in 2012, placing it fifth in the world and second in Europe, after Britain.

French entrepreneurs appear to have prevailed in a campaign to encourage the government to modify plans for a sharp increase in the capital gains tax, which they say would have stifled start-up activity. But they add that the government’s pitch to foreigners looks strikingly at odds with the message sent to would-be investors like Yahoo.

“France Télécom has been a fair partner for DailyMotion, but this company needs to find an appropriate host,” said Jean-David Chamboredon, president of ISAI, a fund that invests in French start-ups. “Montebourg is sending a bad and wrong signal to international investors.”

It is not the first time that France has moved to assert national sovereignty over the digital economy, a push that seems to have gained momentum under the current government. Mr. Hollande has called for
legislation to bring social networks into line with French laws against hate speech, following a spate of anti-Semitic posts on Twitter. He also brokered a settlement in which Google will help finance French news publishers’ efforts to develop their Web operations, and is pushing for foreign Internet companies to pay higher taxes in France.

Mr. Montagnon, of OverBlog, said the move to scuttle a takeover of DailyMotion showed that the administration did not “get” the Internet, where national borders can be surmounted with the click of a mouse.

“It’s a great thing when a company like Yahoo shows an interest in a French company,” Mr. Montagnon said. “I’m not sure DailyMotion should be considered a strategic asset for this country.”