Yahoo refusal earns praise
The battle for Yahoo Inc. heated up over the weekend when the Internet giant rejected a proposal from Microsoft Corp. and billionaire investor Carl Icahn to break up Yahoo.
The “take it or leave it” proposal entailed selling Yahoo’s search business to Microsoft and handing control of the rest of the company to Icahn, Yahoo Chairman Roy Bostock said in an interview.
It was also conditioned on the removal of Yahoo’s board and management.
In a deal presented to Yahoo on Friday, Microsoft Chief Executive Steve Ballmer gave Yahoo’s board 18 to 24 hours to consider the terms that were essentially nonnegotiable, Bostock said.
Yahoo’s counter proposals to sell the company to Microsoft for $33 a share or to negotiate a better deal for its search business at a later date were rebuffed, Bostock said. He characterized Microsoft’s behavior throughout the takeover saga as “erratic and unpredictable” and accused Microsoft of engaging in bullying tactics.
“This latest iteration is trying to bludgeon the Yahoo board into a deal,” Bostock said.
Icahn could not be reached for comment. A Microsoft spokesman declined to comment.
Microsoft launched an unsolicited bid for Yahoo on Jan. 31, triggering a long and frequently bitter fight for control of the Internet company. Microsoft’s newly aggressive strategy of teaming with an activist shareholder sets the stage for a contentious showdown at Yahoo’s Aug. 1 annual meeting. Icahn, who succeeded in sparking discussions between himself, Bostock and Ballmer on Thursday and Friday but fell short of consummating a deal, probably will attempt to replace the Yahoo board with his nominees, including himself.
Yahoo has come under criticism from shareholders for allowing takeover negotiations with Microsoft to collapse. But the latest development in the takeover battle seemed to backfire on Icahn and Microsoft. Analysts and shareholders dismissed the proposal as a stunt to increase pressure on the Sunnyvale, Calif., company.
“It was a particularly stupid offer, and Yahoo rightly rejected it,” said Sanford C. Bernstein analyst Jeffrey Lindsay.
A major shareholder in regular contact with Yahoo and Microsoft management teams agreed it would be “irresponsible” for the Yahoo board to accept the offer.
The terms laid out in a series of phone calls and in writing Friday called for Yahoo to hand over its search business to Microsoft in exchange for $1 billion, plus a guaranteed annual payment to Yahoo of $2.3 billion for five years with the option to renew for another five years with an annual payment of $1.6 billion, Bostock said. Microsoft also proposed that Yahoo sell its Internet properties in Asia and that it would invest $3.9 billion in Yahoo and loan Yahoo $2.8 billion at 5% interest so that the Internet giant could offer shareholders a cash dividend, people familiar with the proposal said.
Yahoo last month formed a search advertising partnership with Google that must clear federal antitrust hurdles because the two companies control more than 80% of the U.S. search advertising market. Microsoft trails at a distant third.
Icahn and Microsoft estimated that their proposal was worth $33 a share to Yahoo shareholders because of presumed cost savings to Yahoo. Yahoo estimated the value to shareholders was significantly less than that.
Bostock said the proposal had “meaningful” improvements since the last time Microsoft bid for Yahoo’s search business, but would earn less than the partnership with Google and ultimately was not in the best interest of Yahoo shareholders. The board rejected the deal after a five-hour discussion Saturday.
Contrary to media reports, Bostock said, the Yahoo board and founder and Chief Executive Jerry Yang have been receptive to selling Yahoo to Microsoft since the Redmond, Wash., software giant launched an unsolicited bid for the company.
In May, when Yang and Yahoo co-founder David Filo traveled to the Seattle area to meet with Ballmer and other Microsoft executives, they had the blessing of Yahoo’s independent directors to negotiate a deal of $33 to $37 a share, Bostock said. Instead, Microsoft withdrew a verbal offer for $33 a share, he said.
Bostock “emphatically” told Ballmer on Saturday that Yahoo would be willing to sell to Microsoft at $33 a share or to negotiate a search deal after the proxy fight, Bostock said.
“If you want to acquire Yahoo, we will do it enthusiastically, management will do it enthusiastically,” Bostock said he told Ballmer. “So let’s sit down and get it done.”
Yahoo’s willingness to explore a sale of the company heartened Larry Haverty, a fund manager at Gamco Investors whose portfolio includes Yahoo shares. He, like some other institutional shareholders, wants Yahoo and Microsoft to combine forces to better compete with Google, which continues to take market share from both.
“The response from Yahoo’s board is probably the first positive thing I have seen out of the whole situation. I do think the board did the right thing here,” Haverty said. “I continue to think the combination of Yahoo and Microsoft would be a spectacular deal for both companies. I hope that’s how it’s resolved.”
Icahn, who controls 69 million Yahoo shares, has criticized Yahoo’s board and Yang for failing to close a deal with Microsoft, which initially offered $31 a share, or about $44.6 billion.
Last month Microsoft switched tactics and offered to buy Yahoo’s search business for $1 billion and to spend an additional $8 billion to buy a 16% stake in Yahoo’s remaining operations. Yahoo instead formed a search advertising partnership with Google to run its advertisements alongside its Internet search results in some cases, a move it said could boost its annual revenue by about $800 million.
Yang co-founded Yahoo more than a decade ago with Filo. The company that has become an Internet icon has struggled in the last few years as profit has declined and growth slowed, frustrating shareholders.
Icahn is trying to gather support from those investors, declaring that Yahoo is “moving toward a precipice.” His campaign picked up steam last week when Microsoft said it would be willing to buy all or part of Yahoo if shareholders ousted the board. It’s unclear whether shareholders would be comfortable putting Icahn in charge.
Said the large shareholder: “Icahn hasn’t given us a great alternative.”