Micro-Hoo: Where Does It Stand Now?

Published: April 30, 2008

by Alex Woodie

Microsoft's Saturday deadline for Yahoo to willingly approach the discussion table came and went with nary a peep from either player, leaving industry tongues wagging about what comes next. One rumor has Microsoft commencing its hostile bid to acquire the unwilling Yahoo as early as today, while a tea leaf reading from Microsoft executive comments last week suggests the software giant is preparing to walk away from the deal. Meanwhile, it's business as usual for Yahoo, by all appearances.

Microsoft CEO Steve Ballmer sent a letter to Yahoo's board of director information in early April threatening to launch a hostile takeover bid and a proxy battle for control of Yahoo's board if Yahoo management didn't start negotiating in earnest by April 26.

That deadline came and went, with utter silence on both sides, causing investors, employees, and customers to wonder if either side is going to blink.

The companies did drop some hints, however. During an event in Milan, Italy, last week, Ballmer suggested for the first time the possibility that Microsoft might be preparing to fold up the acquisition tent and go home. "We think the best way to move [competition with Google] forward quickly is to come together with Yahoo. I hope that it works, but if it doesn't we go forward alone," he said.

Microsoft CFO Chris Liddell was more direct about Microsoft's options during a conference call with financial analysts following the disclosure of Microsoft's financial results last week. In response to an analyst's question about what happens next with Yahoo, Liddell said:

"If we don't consummate a transaction or make significant progress by then [Saturday], I think we've signaled very publicly [that] we'll think about our alternatives. And our alternatives then are to try to facilitate a transition, to possibly go directly to Yahoo shareholders, or to walk away and go back to our original organic strategy. We’ll see what next week brings."

As of Tuesday afternoon, it hasn't brought anything. If Microsoft walks away from the deal, it would almost guarantee an immediate sell-off of Yahoo's shares, which are up considerably from February 1, when Microsoft announced its takeover bid. The loss of billions in market share would anger Yahoo shareholders and perhaps spur another round of investor lawsuits.

If Microsoft walks away, it will have damaged its rival, perhaps fatally. Some theorize that Microsoft could swoop after all the shareholder lawsuits have devalued Yahoo and buy the company on the cheap, a la Oracle and its acquisition of BEA Systems (which was finalized yesterday by the way). But that seems like too much of a long shot to be Microsoft's strategy.

An emerging morale problem within Microsoft could also be swaying Microsoft away from going hostile. According to a story in yesterday's edition of The Wall Street Journal, there is considerable resistance within Microsoft to completing the acquisition. Employees in all sorts of positions are questioning the worth of spending $40 billion to buy a business (online search and advertising) that Microsoft has previously failed to turn into a moneymaker, while the cash cows of Windows and Office are showing their age.

Some publications quoted anonymous sources yesterday saying Microsoft was preparing to launch its hostile takeover as early as today. If it does that, the company is also expected to launch a proxy bid to place friendly directors on the board to thwart Yahoo's poison pill provision, which floods the market with millions of new shares in the event an outsider acquires more than 15 percent of Yahoo's shares. Yahoo has delayed the annual board elections indefinitely in the hopes of thwarting Microsoft's proxy bid, but the company must hold elections by July or be in violations of federal law.

Meanwhile, Yahoo executives are busying themselves with long-term plans to grow the dot-com's business. CEO Jerry Yang recently completed a road show to customers and others to bolster their confidence in Yahoo's business strategy and the benefits of staying independent. Yahoo is also talking up its Yahoo Open Strategy, or YOS, which promises to connect social networking with application developers.

Whatever happens, it's bound to be interesting.

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