The Windows Observer--Microsoft Presses Forward with Yahoo, as Shareholder Lawsuits Mount

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Volume 5, Number 8 -- February 27, 2008

Microsoft Presses Forward with Yahoo, as Shareholder Lawsuits Mount

Published: February 27, 2008

by Alex Woodie

With little real action visible in Microsoft's $41-billion bid to buy Yahoo, the software giant decided to reiterate to the public why the marriage will work. In an executive letter posted to Microsoft's Web site, Kevin Johnson, president of the Platforms & Services Division, lays out the reasons why a combined company makes sense. Meanwhile, several groups of Yahoo shareholders are suing that company for not taking the offer.

Johnson's letter, titled "Update on Yahoo Proposal," brought forward little new information on Microsoft's intended purchase of Yahoo, but it did position Microsoft as an intelligent and caring entity that won't run roughshod over acquired Yahooligans. The 1,800-word letter, which can be read here, reiterated Microsoft's stance that a combined company will be better equipped to compete against "an increasingly dominant player in the advertising industry," which is obviously a reference to Google.

"I have personally met with top executives of the major media companies, and I know there is a desire for more competition in search and online advertising," Johnson writes. "Without this, there's less innovation, less competition, and less value being generated for consumers, advertisers, and publishers."

Since he was supposedly addressing employees, Johnson also addressed the topic of potential layoffs if the acquisition goes through. Any acquisition of this size is bound to be messy, and Johnson didn't deny that there would be layoffs. But he maintains that Microsoft's proposal includes a "thoughtful integration planning process" that includes input from leaders at both Yahoo and Microsoft. He also added that Microsoft would keep Yahoo's headquarters in Silicon Valley, where more than 10,000 Yahoo employees work.

Johnson downplayed any concerns that a culture clash would doom the acquisition before it got off the ground. "We would have an opportunity to bring together the best of both companies--Microsoft's culture of innovation, and long-term commitment to tough R&D problems, with Yahoo’s blend of Web-centric DNA and innovative engineering, 21st century media expertise, and advertising talent," he writes. "Some aspects of the two cultures will naturally merge quickly and some will remain unique in the near-term and merge more slowly over time."

While there might be some temptation to reach out to Yahoo employees, Microsoft employees should keep to themselves for the time being. "It's business as usual" going forward, he writes.

But it's anything but business as usual in the backrooms of Redmond, Sunnyvale, and Wall Street. As Microsoft and Yahoo perform an awkward and somewhat contentious dance for the masses, executives of the companies, institutional shareholders, and their lawyers are picking sides and preparing for a rough-and-tumble conclusion to this big business drama.

In recent weeks, several groups of shareholders have filed lawsuits against Yahoo's management, alleging they haven't pursued their shareholders' best interests by rejecting Microsoft's offer. In the latest suit, filed Thursday on behalf of two public pension systems in Detroit, the plaintiffs argue that the severance packages passed by Yahoo's board last week are aimed at making the acquisition prohibitively expensive for Microsoft. Those severance packages could give Yahoo employees up to $1 billion if they're fired in connection with an acquisition. The suit seeks class action status.

And don't forget the proxy battle that Microsoft is reportedly preparing to launch against Yahoo's bard of directors. Every board seat is up for grabs this spring, and the deadline for nominations is March 13.

With all the backroom dealings and public posturing, in doesn't appear Microsoft is inclined to sweeten its initial offer (a mixture of cash and Microsoft stock) that valued 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. Instead, it appears ready to force Yahoo to take the offer, or severely weaken itself by defending the takeover attempt.