Microsoft, Yahoo elbow each other over buyout offer

In an elaborate display of corporate posturing, top executives at Microsoft and Yahoo exchanged letters Saturday and Monday as their acquisition standoff plods into its third month.

The main arguments of these carefully lawyered statements were easy to detect.

Microsoft Chief Executive Steve Ballmer on Saturday gave Yahoo an April 26 deadline to reach an agreement on his $31-a-share offer or face a hostile takeover attempt and a potentially lower price.

Yahoo leaders believe the current offer still "substantially undervalues" their company.

"[W]e are not opposed to a transaction with Microsoft if it is in the best interests of our stockholders," Yahoo Chairman Roy Bostock and CEO Jerry Yang responded in their missive Monday. "Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo!, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders."

The letters also contain subtle language each company is using to sway investor opinion and establish a position of strength for eventual negotiations or legal action, merger-and-acquisition experts said.

"We're so used to this," said one Wall Street analyst, who asked not to be named while belittling the rhetoric. "This is like the peacocks have unfurled their feathers and are out dancing around."

Microsoft's ultimatum was a signal to Yahoo investors that it is time to pressure Yahoo's board, which first formally rejected the deal Feb. 11, deal watchers said.

However, the ultimatum is unlikely to bring Yahoo to the table. "The theory is that the deadline will frighten Yahoo shareholders sufficiently to put even more pressure on Yahoo's management and board to negotiate," said Scott Keller, a founder and analyst at Deal Analytics, a New York City research firm.

"No board or management will take it terribly seriously, however," he said. "The bottom line is that if Microsoft wants to buy Yahoo, they are either going to pay whatever price is fair or walk away regardless of any time constraints."

To get the Yahoo board's attention, Microsoft would need to make good on its threats and actually launch a proxy fight or take the deal directly to Yahoo shareholders through an exchange offer, Keller said.

Yahoo's leaders Monday countered Ballmer's assertions that their company's business has deteriorated since the offer was first made, reiterating their faith in Yahoo's long-term value as described in a sunny three-year forecast released in mid-March.

Microsoft has called into question that forecast, emphasizing the risk to Yahoo investors of spurning the current offer and hoping Yahoo can do better on its own.

The question of Yahoo's true financial condition in a weakened economy will be answered April 22 when it reports its first-quarter earnings.

Yahoo's letter includes phrases meant to emphasize that Microsoft's proposal is not without risk for its own for shareholders.

For instance, the company's insistence that any transaction be "on terms that provide certainty to our stockholders" could be read as a jab at Microsoft's declining stock price, said Jarrad Harford, a finance professor at the University of Washington's Michael G. Foster School of Business.

Microsoft is proposing a half-cash, half-stock deal. As its stock falls, so does the total price to be paid for Yahoo. The deal's value stood at $42.2 billion after Monday's trading.

Yahoo fell 66 cents, or 2.3 percent, to $27.70. Microsoft was unchanged at $29.16.

If the companies were to reach a deal, the price could still fluctuate with Microsoft's stock as regulators in the U.S., Europe and perhaps China spent months reviewing it.

Harford said Microsoft could eliminate this uncertainty for Yahoo shareholders with a "collar" that effectively guarantees the value would remain constant or within a certain range.

In addition to pressing for more money and better terms, Yahoo's response contained code words telling investors and would-be litigants that the board is doing its duty.

When a company is up for sale, "a board's one and only duty is to maximize shareholder value," said Richard Rafferty, a corporate and securities lawyer with Dallas-based Strasburger & Price.

The phrase "maximize shareholder value" or something similar appears in the Yahoo letter seven times.

The letters also gave a very different view of Yahoo's willingness to negotiate. Microsoft asserted that "no meaningful negotiation" had taken place to conclude an agreement.

Yahoo, attempting to show it isn't the one dragging feet, said it is still waiting on answers to questions it asked Microsoft on March 28 about regulatory issues raised by the transaction.

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