Skirmish may start long Yahoo war

Microsoft and Yahoo exchanged carefully chosen words Monday, following the script in an unfolding acquisition drama that may run to several acts.

As expected, Yahoo's 10-member board formally and unanimously rejected Microsoft's public buyout offer, a decision announced through anonymous media leaks during the weekend.

Directors said the offer, originally pegged at $44.6 billion, or $31 a share, is not in the best interests of shareholders and "substantially undervalues" the company. Those same weekend leaks had floated a $40-per-share price tag.

Microsoft fired back, calling Yahoo's decision "unfortunate" and noting it "does not change our belief in the strategic and financial merits of our proposal."

The company is bidding for Yahoo in an attempt to boost its online services and the advertising revenue they generate, an area where both companies trail Google.

Microsoft gave no clear indication of its next move. There are several at its disposal, and the company reiterated its right to "pursue all necessary steps."

"That's pretty typical," Richard Rafferty, a corporate and securities lawyer with Dallas-based Strasburger & Price, said of the exchange that played out Monday.

Even though Microsoft's offer, made public Feb. 1, represented a 62 percent premium to Yahoo's share price the day before the bid was announced, that price was nearly the lowest for the stock in four years.

"I would have been very surprised if Yahoo had accepted the offer," Rafferty said, noting that when a board decides to sell, it is obligated to get the best price it can.

Yahoo's board said it is "continually evaluating all of its strategic options," but did not indicate the presence of other potential bidders.

Some analysts expect Microsoft to sweeten the deal, which has grown less sweet already because of its structure.

Microsoft proposes to buy Yahoo with cash and stock; as a result, the purchase price moves when its shares do. Since the proposal was announced, Microsoft's shares have slid about 13 percent, closing Monday at $28.21.

At that price, the value of the offer is $28.91 a share.

Sid Parakh of Seattle-based McAdams Wright Ragen expects Microsoft "to be willing to pay up to [roughly] $35 per share, going as high as $40," which he thinks is too high.

Parakh doesn't support the deal and hopes it falls through, but he thinks that's unlikely, he wrote in a note to investors.

The next move may belong to major institutional investors, many of which own shares in both companies.

Microsoft said it has talked with "stakeholders of both companies."

That is standard mergers and acquisitions strategy, said Jarrad Harford, a finance professor at the University of Washington's Michael G. Foster School of Business.

"They can reach out directly to Yahoo's larger investors and get them to put pressure on Yahoo's board to negotiate at some reasonable level, presuming that Microsoft views $40 a share as a sort of fanciful opening bid from Yahoo's standpoint," he said.

Some Yahoo shareholders are already showing unrest.

A pension fund for employees of Wayne County, Mich., which owns 13,600 Yahoo shares, sued Yahoo, asking a judge to force the company to fully consider takeover offers.

Yahoo's "refusal to engage in meaningful negotiations with Microsoft or others has impeded, and will continue to impede, Microsoft's willingness to increase its offer," the fund's lawyers contend in the complaint, according to Bloomberg News.

Among Microsoft's more aggressive options is a formal tender offer in which the company would buy Yahoo shares, likely using a combination of cash and its own stock, directly from shareholders.

This method has its limitations because Yahoo's board in 2001 instituted a shareholder rights plan, also known as a "poison pill."

"If anybody acquires more than 15 percent ownership of the company, it triggers a pretty catastrophic response," said Rafferty, the securities lawyer.

The response would allow other shareholders to purchase Yahoo shares at half price, diluting the position of the would-be acquirer.

UW's Harford said Microsoft could gain leverage by making a tender offer and gauging the interest of Yahoo investors.

If a majority "voted with their shares" and elected to participate, Microsoft would have "a very strong bargaining chip" and be able to counter Yahoo's claims that the offer is not in shareholders' interests, he said.

An even more aggressive and less likely move would be a proxy fight in which Microsoft would try to replace Yahoo's directors with its own slate of candidates.

Beginning Wednesday, Yahoo shareholders can submit director candidates. Nominations must be in by March 13, and elections will be at the annual shareholder meeting, which has not been scheduled but typically takes place in late May or early June.

Despite having the poison pill and other measures to fight unwanted takeovers, Yahoo's entire board stands for election each year.

Some companies' directors serve three-year terms, with only a third of the board up each year. That means an acquiring company would have to see its slate of directors elected two years in a row to gain a majority.

By contrast, it is possible for an acquiring company to get a majority on the Yahoo board in a single election.

Still, a proxy fight is often bitter and can cause employees — the human capital so sought after in technology — to see the buyer in a negative light.

"A flat-out proxy fight is going to be the last resort for [Microsoft]," Harford said.

"... [H]ostile takeovers in technology are kind of rare because if you poison the water, the very people that you are wanting to bring into the Microsoft fold could just leave, and then you are not getting the value you were trying to get."

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com