Microsoft vows Yahoo fight

Times Staff Writer

Just hours after Yahoo Inc. spurned its unsolicited takeover offer, Microsoft Corp. on Monday set the stage for a fight by pledging to clinch the technology mega-deal by any means necessary.

Yahoo formally rebuffed Microsoft after its board conducted a 10-day review, concluding that Microsoft’s $44.6-billion offer “substantially undervalues” the Internet pioneer.

But the world’s largest software maker, versed in the art of hardball negotiations and confident it could close the deal, made clear that it did not plan to back off the cornered Yahoo. Buying Yahoo is crucial to Microsoft’s strategy of competing against online juggernaut Google Inc. in the surging business of online advertising, analysts say.

Both companies are courting large Yahoo shareholders. But no other suitors have appeared on Yahoo’s horizon, and analysts have largely discounted other options that could help Yahoo remain independent, such as farming out its search advertising business to Google.


Yahoo itself left the door open to further negotiations in its rejection letter.

In a statement issued before the stock market opened, Yahoo said its board was “continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders.”

Analysts said the Yahoo board was fulfilling its obligations: to give Yahoo management a shot at proposing a plan to boost the stock above Microsoft’s bid, to solicit rival bidders and to wrest the highest price possible from Microsoft. Curiously, Yahoo did not say the offer was “inadequate,” a code word usually used to wrest more money from suitors in hostile situations.

Investment banker Ken Marlin called the back-and-forth between the two companies “an elaborate kabuki dance” that would eventually conclude with a deal.


“No one believes that Microsoft has put their final offer on the table,” said Marlin, managing partner of Marlin & Associates. “What Microsoft wants is someone to sit down and negotiate with them. The Yahoo board’s not quite ready to do that. But they will get there.”

Microsoft has not yet spelled out how far it is willing to go.

It could take the gentle approach and sweeten its offer enough to win over the Yahoo board -- but not so much that it alienates investors who have stakes in both companies.

Or it could turn hostile, taking its offer directly to shareholders and launching a proxy fight to oust Yahoo’s 10-member board to gain control of the company. Microsoft has until March 14 to nominate its own slate of candidates for Yahoo’s board.


Yahoo might have resisted falling into Microsoft’s outstretched arms, but that’s where it will end up, analysts agreed.

“For Yahoo, this is not a question to merge or not to merge, it’s just a question of how high a price can it get,” said Bill Burnham, a managing partner at hedge fund Inductive Capital.

Microsoft’s half-cash, half-stock offer of $31 a share represented a 62% premium when it was made Jan. 31, but the decline in Microsoft’s shares has lowered the offer’s original value. Yahoo, in the meantime, has benefited from Microsoft’s interest. Its shares have gained at a time when many technology stocks are declining. Yahoo’s stock had plunged more than 40% in the three months prior to the takeover bid.

Analysts say Microsoft could increase its offer to as high as $35 a share.


Yahoo’s board did not indicate what price it would accept, but analysts are betting that the two companies settle on one, particularly in light of Yahoo’s disappointing financial performance and the economic slowdown that is likely to further damp online advertising prospects.

Yahoo Chief Executive Jerry Yang, in an e-mail to employees Monday, defended the board’s decision to reject Microsoft’s offer. Yang said the company was on solid footing and “putting in place the pieces we need to accelerate growth.”

Yang, who co-founded Yahoo in 1995 with fellow Stanford University graduate student David Filo and replaced Terry Semel as CEO in June, has been working behind the scenes to thwart Microsoft. He contends that Microsoft’s offer fails to take into account Yahoo’s strong brand, global Web audience, big investments in advertising technology and growth potential.

But Yang has not explained how he plans to deliver the payout that shareholders would receive by selling to Microsoft.


Yahoo is taking one step that analysts have called for: It plans to lay off 1,000 of its 14,300 workers today. The company disclosed the cuts during its fourth-quarter earnings call, as it forecast continued tough times ahead and right before Microsoft made its unsolicited bid.

Yahoo could be worth as much as $40 a share, the price bankers floated over the weekend, if it takes a number of steps, including outsourcing Web search to Google, cutting jobs and buying the online advertising portions of Time Warner Inc.'s AOL, Sanford C. Bernstein & Co. analyst Jeffrey Lindsay said in a research note. But he said Yahoo would still face a challenge convincing shareholders that the strategy trumps a deal on the table.

“I don’t think Yahoo has a better plan for shareholders,” David Hilal, associate director of research at Friedman, Billings, Ramsey & Co., said.

Yahoo’s slumping fortunes and the lack of decisive action on the part of management have tried investor patience. A return to the four-year low the stock hit before the Microsoft offer would rile them even more. Speculators have snapped up shares, giving them a greater say in its future. And some shareholders are organizing.


“I’m disappointed that it’s a flat rejection without an explanation for why Yahoo is so undervalued by the street or what their plan as a board is to better monetize these overlooked assets they have,” said Eric Jackson, who heads a dissident group of Yahoo shareholders campaigning to sell their shares as a block. “I hope this is just bravado negotiation, not a serious consideration to go it alone. That wouldn’t serve shareholders.”

Yahoo is also getting hit with lawsuits. The Wayne County Employees’ Retirement System of Michigan, which owns 13,600 shares, asked a Delaware Chancery Court judge Monday to ensure that Yahoo fully considers takeover offers. On Feb. 1, the day Microsoft made its offer public and said it had been rebuffed in its bid to buy Yahoo a year ago, Yahoo shareholders filed suit in Santa Clara County Superior Court because it hadn’t negotiated with Microsoft.

Yahoo shareholders could intervene directly, analysts said. After Oracle made an unsolicited bid for software maker BEA last year, BEA’s largest investor, Carl Icahn stepped in. He negotiated a deal with Oracle that was higher than its initial offer but lower than BEA’s counter-offer.

“There is a public negotiation going on here. This is one step in that process,” Stanford Group analyst Clayton Moran said. “Our sense is neither Microsoft or Yahoo have a lot of alternatives outside of each other. We think that they will dance around each other a little bit then they are likely to come to an agreement.”



Times staff writer Michelle Quinn contributed to this report.