Micro-Hoo Degenerates as Deal Goes Sour

Published: July 16, 2008

by Alex Woodie

The soap opera that is Microsoft's nearly six-month attempt to buy some or all of Yahoo deteriorated into a battle of dueling press releases and contradictory statements this week. With Carl Icahn's proxy battle in full swing two weeks before Yahoo's annual shareholder's meeting, hope of an amicable agreement among the three players declined. Meanwhile, Microsoft's top lawyer testified in Washington, D.C., about how Yahoo's ad deal with Google will affect competition.

The latest brouhaha began last Friday, when executives for Yahoo and Microsoft--including Microsoft CEO Steve Ballmer and Yahoo CEO Jerry Yang--and Icahn, a major investor in Yahoo, met via phone to talk about a potential deal that would involve Yahoo selling its search business to Microsoft (the first resurrection of the deal, floated in May). While nobody but the participants of the meeting know exactly what was said, it is obvious from the differing accounts of the meeting that there are very strong disagreements in how a deal will get done, or even if a deal will get done.

According to Icahn, Microsoft was willing to pay $7.7 billion to Yahoo, which would include $1 billion for the search business, a $2.8 billion loan, and $3.9 billion tender offer to Yahoo shareholders. Microsoft would also be willing to guarantee the remaining part of Yahoo, which would be a content company, at least $2.3 billion in revenue per year for five years (with a possible extension to 10 years), provided Yahoo kept the same level of page views and traffic from affiliates that they have now.

Yahoo struck first with a press release on Saturday night that strongly rejected Microsoft's latest offer and the conditions surrounding that offer.

" . . . Icahn and Microsoft presented us with a 'take it or leave it' proposal under which we would be required to restructure the company, hand over to Microsoft Yahoo's valuable search business, and to Carl Icahn the rest of the company, giving us less than 24 hours to respond," Roy Bostock, chairman of Yahoo, stated in Yahoo's letter, which can be read in its entirety here. "It is ludicrous to think that our board could accept such a proposal."

Interestingly, Yahoo says it was amenable, during the Friday meeting, to selling the entire company to Microsoft for $33 per share--a deal that Yahoo previously turned down, and has been widely criticized for. But Microsoft was no longer interested in discussing that deal, according to Yahoo. "We are prepared to let our stockholders, not Microsoft and Carl Icahn, decide what is in their best interests and we look forward to the upcoming vote."

After taking a break on Sunday (corporate titans need a day of rest, too), Icahn and Microsoft struck back with their own letters Monday.

In his letter, Icahn took Yahoo to task for perceived aberrations in its account of Microsoft's offer. "Over the years I have attempted to make changes at many companies, but I have yet to see a company distort, omit and twist events and facts in the manner that Yahoo has done," Icahn begins in his letter, which can be viewed at this SEC Web page.

"Instead of being interested in the Microsoft offer, [Yahoo] seemed to me to be focused on who would be running Yahoo," Icahn writes. "Finally, Steve Ballmer suggested that we not spend the rest of Friday afternoon on corporate governance. 'First tell us if you like the deal,' he said."

The 24-hour "take it or leave it" window was also not as solid as Yahoo made it out to be, according to Icahn, who said Yahoo "neglects to mention that they were offered more time if they would be willing to postpone the annual meeting for a short period."

Microsoft also felt compelled to "set the record straight" regarding Yahoo's July 12 letter and the perceived ultimatum. In Microsoft's response, which can be viewed here, Microsoft talks about the conditions surrounding the offer.

"At the time Microsoft submitted its enhanced proposal," the letter states, "Microsoft asked that Yahoo confirm whether it would agree that the enhancements were sufficient to form the basis for the parties to engage in negotiations over the weekend on a letter of intent and more detailed term sheets. This discussion has been mischaracterized as a take it or leave it ultimatum, rather than a timetable in order to move forward to intensive negotiations."

Meanwhile, as Yahoo seems intent on hooking its giddy up to Google, Microsoft general counsel Brad Smith went to Washington, D.C, where he testified on the potential Yahoo-Google deal before Congressional antitrust subcommittees.

"If search is the gateway to the Internet," Smith says, "this deal will put Google in a position to own that gateway and the information that flows through it. Never before in the history of advertising has one company been in the position to control prices on up to 90 percent of advertising in a single medium. Not in television, not in radio, not in publishing. It should not happen on the Internet."

Microsoft also put out a fact sheet on Google and Web advertising. Google's market capitalization (nearly $164 billion) is bigger than that of Boeing and Coca-Cola's, combined. (Of course, Microsoft doesn't mention that its own market capitalization--$234 billion--is bigger than the market capitalizations of Airbus, Amazon, GM, IBM, and Motorola combined.)

Assuming Congress doesn't stand in the way of the Google-Yahoo partnership, the group with the greatest power to shape the Internet advertising market for the foreseeable future will be Yahoo's shareholders, who have a choice between the white proxy cards (Yahoo's) and the gold proxy cards (Icahn's).

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