Yahoo Rebuffs Microsoft's Threat of a Hostile Takeover

Published: April 9, 2008

by Alex Woodie

The stalemate in Microsoft's nine-week attempt to buy Yahoo has finally broken, spurred by a threat by Microsoft CEO Steve Ballmer to go hostile with the takeover bid if Yahoo doesn't accept the deal within three weeks. The threat didn't sit well with Yahoo executives, who questioned Ballmer's intentions while maintaining that Microsoft needs to pony up more dough to seal the deal.

The fun started last week when rumors about more executive-level meetings between Microsoft and Yahoo began to emerge. Apparently, the meetings didn't go too well, because on Saturday, Microsoft posted on its Web site a letter from Ballmer addressing Yahoo's board.

"While there has been some limited interaction between management of our two companies, there has been no meaningful negotiation to conclude an agreement," Ballmer wrote in his 490-word letter. "If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo board."

The letter did not sit well with Yahoo's CEO Jerry Yang and chairman Roy Bostock, who responded with an 881-world letter of their own. "Dear Steve," the pair began. "We consider your threat to commence an unsolicited offer and proxy contest to displace our independent board members to be counterproductive and inconsistent with your stated objective of a friendly transaction."

In his letter, Ballmer also raised the possibility that Microsoft would lower its offer following the conclusion of the three-week period. The original offer, which was based on a mix of cash and Microsoft stock, valued Yahoo at $31 per share (a 62 percent premium at the time), or $44.6 billion. Today, the deal is worth about $41 billion, or $29 per share, due to declines in Microsoft's stock since it made the offer. The country's financial problems only makes Microsoft's initial offer that much sweeter, according to Ballmer.

Yahoo has steadfastly maintained that Microsoft's offer "substantially undervalues" the company. But apparently the company is willing to do a deal, if the price is right, which reportedly is a price in the area of $34 per share.

"We are open to all alternatives that maximize stockholder value," Yang and Bostock wrote. "To be clear, this includes a transaction with Microsoft if it represents a price that fully recognizes the value of Yahoo on a standalone basis and to Microsoft, is superior to our other alternatives, and provides certainty of value and certainty of closing."

Yahoo is under the gun to do some type of deal. The company has discussed partnerships with AOL Time Warner and News Corp., but nothing solid has come of it. Yahoo also faces several shareholder lawsuits from institutional investors who are angry that Yahoo has turned down Microsoft's money, and want the deal done. If Yahoo doesn't make a move, it risks even more lawsuits.

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