Proxy Battle Looms in Microsoft's Bid for Yahoo

Published: February 20, 2008

by Alex Woodie

The drama between Yahoo and Microsoft continued to unfold this week, as Yahoo CEO Jerry Yang reiterated the company's position that Microsoft is offering too little money, and Microsoft chairman Bill Gates said the deal was fair. With the issue at a stalemate, the New York Times reported that Microsoft is preparing to launch a proxy battle with Yahoo's board.

In a letter to shareholders, Yang encouraged shareholders to remain patient and stand with him in the rejection of Microsoft's offer. "I wanted to reach out to you personally to let you know why your Board of Directors, after a careful review by Yahoo's management along with our financial and legal advisors, believes that Microsoft's proposal substantially undervalues Yahoo and is not in the best interests of our stockholders," he said in the letter.

Yang listed several Yahoo strengths, including the company's brand, its popularity with PC and mobile users, its strength in advertising, its $2 billion cash balance, its data centers, and its overseas assets. Nevertheless, Yang says, Yahoo's board is "continuously evaluating all of Yahoo's strategic options," and remains "committed to pursuing initiatives that maximize value for all our stockholders."

Microsoft has maintained that its offer to buy Yahoo is a generous one, and doesn't appear ready to sweeten its initial offer. On February 1, the company offered $44.6 billion in cash and Microsoft stock. The offer was based on a valuation of Yahoo's stock at $31 per share--a 62 percent premium on Yahoo's stock price at the time. Microsoft's per-share price has since declined, lowering the total value of the package to about $41 billion.

Yesterday, Gates encouraged Yahoo to take another look at the offer. "We sent them a letter and said we think that's a fair offer," Gates said during a conference call for Microsoft's new plan to give software to children, according to the Associated Press. "They should take a hard look at it."

Last week, after Yahoo formally rejected Microsoft's first offer, Microsoft stated it "reserves the right to pursue all necessary steps" to make the acquisition a reality--an apparent reference to the possibility that Microsoft could go hostile with its bid.

That possibility appears more likely this week following a New York Times report that Microsoft was preparing to launch a proxy battle in its quest to buy Yahoo. Quoting anonymous sources, the Times reported that, unless Yahoo steps up to the table to talk to Microsoft, the software giant would launch a bid to place several directors on Yahoo's board. All board seats are up for re-election, and the cutoff for nominations is March 13.

A hostile bid could be damaging for both Yahoo and Microsoft (although the cost--$20 million to $30 million--is small compared to any increase in the offer). While institutional investors, which hold about 70 percent of the Yahoo stock, are reportedly in favor of accepting Microsoft's offer as it stands, Yahoo's board of directors still stand in the way of the deal, and could execute a "poison pill" defense to make an acquisition prohibitively expensive.

Yahoo board members have unofficially said they would accept a revised offer from Microsoft in the neighborhood of $40 per share. While many in the industry think Microsoft should increase its offer (after all, who accepts the first unsolicited bid?), it's unclear if Microsoft wants to own Yahoo that badly.

In some ways, Microsoft may have already achieved its aims with its unsolicited offer--namely, putting top dog Google on the defensive, and singling out Yahoo's weakness. It could let the deal die, leaving Yahoo forced to partner with another Internet company, and leaving Microsoft as the only viable alternative in a Google-dominated market.

Microsoft's stated reason for pursuing Yahoo is to better compete with Google for search revenues, online advertising, and Web-based apps. It also says the combined company could save about $1 billion a year in operational costs. Google currently dominates the Web search market, with about 60 percent of global Web searches executed by Google, compared to about 18 percent for Yahoo, and 12 percent for Microsoft.

The market for online advertising--a business Microsoft says will grow from $40 billion in 2007 to $80 billion business by 2010--is much more fragmented, according to data from IDC, which says Google has about 24 percent of the market compared to 17 percent for the combination of Microsoft and Yahoo.

Meanwhile, rumors that News Corp. is in talks with Yahoo won't go away. News Corp., which owns Fox, MySpace, and the Wall Street Journal, reportedly is interested in a deal that would merge MySpace and other sites with Yahoo in return for a 20 percent stake in the combined company.

RELATED STORIES

Yahoo Rejects Microsoft's Bid; Google's Ad Revenues Hiccup

Microsoft Offers $44.6 Billion for Yahoo!

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