Yahoo explains why Microsoft offer is too low

SAN FRANCISCO — Yahoo has released a rosy outlook for the next two years, hoping to give investors a better understanding why the slumping Internet pioneer isn't willing to sell to Microsoft for less than $45 billion.

Analysts interpreted the unscheduled disclosure Tuesday as a sign that Yahoo's attempts to find an alternative deal to Microsoft's 6 1/2-week-old offer aren't bearing fruit.

The Sunnyvale, Calif., company has been exploring alliances with Google, News Corp.'s MySpace.com and Time Warner's AOL.

With its options apparently narrowing, Yahoo is under pressure to justify its board's decision last month to rebuff a takeover offer that was 62 percent higher than the company's market value when the courtship began.

Microsoft's cash-and-stock bid was initially valued at $44.6 billion, or $31 a share — a price Yahoo concluded wasn't enough, even though it came after a two-year decline in the company's profit.

Making its case

By sharing internal projections drawn up in December, Yahoo appears to be making a case for either its independence or a higher offer from Microsoft.

The forecasts predict Yahoo's revenue — minus advertising commissions — will climb more than 70 percent during the next three years to reach $8.8 billion in 2010.

Microsoft so far hasn't wavered from its original offer, which it has described as fair. The software maker has indicated it will try to oust Yahoo's board if the resistance continues.

But the two sides signaled they might be ready to negotiate when senior executives from Yahoo and Microsoft last week held their first face-to-face meeting in Silicon Valley. No investment bankers attended that icebreaker, nor was a potential price discussed.

Stanford Group analyst Clayton Moran described Yahoo's decision to release its projections as "another step in the public negotiation between these two companies. We believe this deal is turning friendly."

Echoing previous remarks, Yahoo Chairman Roy Bostock said the board and management "will continue to work closely together to ensure that any strategic path we pursue ... maximizes the benefit to our stockholders."

A Microsoft spokesman didn't immediately respond to requests for comment.

Investors hopeful

Yahoo's maneuver appeared to hearten investors as the company's shares surged $1.81 to finish Tuesday at $27.66, a gain of 7 percent. Microsoft shares rose $1.12, or 4 percent, to $29.42.

Because half of Microsoft's proposed purchase would be financed with stock, the deal's value has fluctuated since the bid was announced Feb. 1.

The offer is currently worth about $41 billion, or $29.49 a share.

Many analysts have predicted Microsoft would be willing to pay as much as $35 a share, or about $50 billion, for Yahoo to avoid a bitter fight that could alienate employees and make it more difficult to combine the companies.

But Moran said the chances of Microsoft raising the stakes that high are fading with most economic indicators pointing to a recession.

He thinks Microsoft will hold firm at $31 a share but may try to placate Yahoo by agreeing to pay entirely in cash.

Concerns about an economic downturn had raised fears Yahoo might miss its first-quarter targets, but the outlook released Tuesday reaffirmed the previous guidance for the period, which ends March 31.

As management warned in January just before Microsoft made its bid, Yahoo has modest growth expectations for 2008 after its lackluster performance in the previous two years.

Yahoo still anticipates its revenue, after subtracting advertising commissions, to total $5.7 billion this year, in line with analyst expectations.

But it assured investors its plans to grab a bigger piece of the online advertising market will become more evident after this year, with revenue climbing by about 25 percent in 2009 and 2010.

After subtracting ad commissions, Yahoo's revenue predictions of $7.1 billion in 2009 and $8.8 billion in 2010 are well ahead of analyst estimates of $6.4 billion in 2009 and $7.6 billion in 2010.