Running out of time and options, Yahoo Inc. again rebuffed Microsoft Corp.'s buyout offer Monday and continued to seek refuge in the arms of Time Warner Inc.
Yahoo, which faces a hostile takeover fight if it doesn’t reach a deal with Microsoft by April 26, is trying to sell a substantial minority stake to Time Warner, according to people familiar with the talks. The deal being discussed would combine Yahoo with Time Warner’s beleaguered AOL Internet unit.
Time Warner’s stake, if committed to support Yahoo’s management against Microsoft, would make it harder for the software giant to win a threatened proxy fight.
Yahoo and Time Warner declined to comment on the talks. Several analysts said they were skeptical that Yahoo could pull a rabbit out of its hat.
“Yahoo is going to be sold to Microsoft,” technology investment banker Ken Marlin said. “It’s inevitable now.”
In a letter sent to Yahoo’s board Saturday, Microsoft said it would seek to elect its own slate of directors in a proxy fight if Yahoo didn’t come to terms within three weeks. If no deal is reached, Microsoft said, it would probably lower its price to reflect slowdowns in the general economy and at Yahoo.
On Monday, Yahoo dismissed the argument that its business was deteriorating and again called Microsoft’s roughly $40-billion cash-and-stock bid too low. It was the second time Yahoo had spurned the offer since Microsoft made it Jan. 31.
But in their reply, Yahoo Chief Executive Jerry Yang and Chairman Roy Bostock wrote that they remained open to joining the software giant if nothing better came along.
“We are open to all alternatives that maximize stockholder value,” they wrote to Microsoft Chief Executive Steve Ballmer. “To be clear, this includes a transaction with Microsoft if it represents a price that fully recognizes the value of Yahoo on a stand-alone basis and to Microsoft, is superior to our other alternatives, and provides certainty of value and certainty of closing.”
Yang and Bostock also said that Microsoft was being “unconstructive” and that the tone of Ballmer’s letter undermined the “friendly” approach that he claimed to be taking.
They also said that stockholders representing a significant portion of outstanding shares had indicated that the Microsoft proposal “substantially undervalues” Sunnyvale, Calif.-based Yahoo.
“We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders,” the Yahoo executives wrote.
Executives from the two companies have met twice since Microsoft made its offer public but have not engaged in formal negotiations. A drop in Microsoft’s share price has reduced the offer to about $29 a share from its initial value of $31. When made, the offer gave Yahoo shareholders a 62% premium over the most recent closing stock price.
Microsoft shares closed at $29.16, unchanged from Friday. Yahoo fell 66 cents to $27.70.
Yang and Bostock rejected Ballmer’s view that Yahoo has refused to negotiate.
“We have had constructive conversations together regarding a variety of topics, including integration and regulatory issues,” they wrote.
A Microsoft spokesman didn’t respond to requests for comment.
Although Yahoo’s letter struck a defiant tone, analysts said its main goal might have been to persuade Microsoft to make an all-cash offer instead of the current bid or to raise its offer slightly so that Yahoo could save face.
“Raise the offer price and we will have something to talk about,” said one person close to Yahoo who spoke on condition of anonymity because of the sensitivity of the talks.
Charles Di Bona, an analyst with Sanford C. Bernstein, said Microsoft had left the door to a better deal open by a few inches.
Saturday’s letter suggested that the initial premium was still available, and Di Bona said that could mean the original value of $31 a share could return, perhaps in an all-cash transaction. “They left a little room out there,” Di Bona said.
Yahoo’s main leverage is Microsoft’s desire to clinch a friendly deal. A hostile takeover attempt could prompt Yahoo to turn for help to European antitrust regulators, who have already crossed swords with the Redmond, Wash.-based maker of Windows software.
A proxy fight also would delay the union and mean more losses of key Yahoo employees. A former Yahoo executive said Monday that employee retention had become a big problem.
Absent a stumbling block such as a Time Warner deal, Microsoft has the presumed edge in a proxy fight. Yahoo has argued that it is undervalued, saying its operating results will improve dramatically in the next three years.
In recent interviews, though, some major shareholders pointed to years’ worth of previous promises that have gone unfulfilled. The next test will come April 22, when Yahoo is scheduled to report first-quarter earnings.
“I would vote for a Microsoft slate, and others would too,” said one big investor, who requested anonymity because his company doesn’t comment on individual holdings. “Yahoo does not have a wellspring of support.”
Menn reported from Los Angeles, Guynn from San Francisco.