In The News

The takeover target says the $44.6–billion unsolicited offer is too low.

SAN FRANCISCO (February 11, 2008) –– After being rebuffed by Yahoo Inc. today, Microsoft Corp. fired back by saying it planned to move quickly and by whatever means necessary to clinch the deal to buy the Internet company.

It did not elaborate on what steps it planned to take, but called its $44.6–billion offer "full and fair." Analysts have said Microsoft could sweeten its offer, nominate it own slate of directors to Yahoo’s board or tender the offer directly to shareholders.

"It is unfortunate that Yahoo has not embraced our full and fair proposal to combine our companies," Microsoft said in a statement. "Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties."

Microsoft said investors, consumers and advertisers would benefit from combining the two companies, which would create a more formidable No. 2 competitor to Google Inc. in Internet search and online advertising.

The deal would be the largest in Microsoft’s 33–year history.

Shares of Yahoo rose 67 cents, or 2.3%, to $29.87, while Microsoft dropped 35 cents, or 1.2%, to $28.21.

Sunnyvale, Calif.–based Yahoo formally rejected Microsoft’s takeover bid before the stock markets opened, saying it "substantially undervalues" the struggling Internet pioneer.

Yahoo said that its board had "unanimously concluded that the proposal is not in the best interests of Yahoo and our stockholders." It said the unsolicited bid, which Microsoft made Jan. 31, failed to take into account Yahoo’s strong brand, global Web audience, big investments in advertising technology and growth potential.

"There is a clear path to a higher offer," said Ken Marlin, managing partner of Marlin & Associates, a technology–focused investment bank. "The board knows it and is already engaged in the elaborate kabuki dance to get there. They will."

The decision was reached by Yahoo’s board Friday and reported by news organizations, including The Times, over the weekend. The statement did not explain how Yahoo planned to deliver the payout that shareholders would have received by selling to Microsoft.

No other bidders have emerged for Yahoo.

"The board of directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders," the statement said.

Analysts say Yahoo’s board is maneuvering to wrest a higher bid from Microsoft. Microsoft’s half–cash, half–stock offer of $31 a share on Feb. 1 at the time represented a 62% premium, but the decline in Microsoft’s shares had lowered the stock portion to around $29.

Yahoo’s stock has plunged more than 40% in the three months before Microsoft’s bid, dragged down by unfulfilled promises of a turnaround.

Redmond, Wash.–based Microsoft could sweeten its offer and pay anywhere from $35 to $40 a share for Yahoo, analysts say. Another option: Microsoft could take its offer directly to shareholders.

Microsoft would like to avoid a hostile takeover to avoid alienating Yahoo employees and to increase the odds of clearing regulatory hurdles, analysts say. But in Microsoft’s offer letter, Chief Executive Steve Ballmer implied that the company would be willing to turn the bid hostile.

"Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo’s shareholders are provided with the opportunity to realize the value inherent in our proposal," Ballmer wrote.

RBC Capital Markets Internet analyst Jordan Rohan said today that the rejection was not a surprise and signaled that Yahoo was merely making a counteroffer in a highly choreographed negotiation to extract the best price for shareholders.

He noted that a year ago Yahoo spurned Microsoft’s advances without countering. He said Yahoo would be unable to turn down an offer from Microsoft in the mid–$30s without another offer in hand.

"Yahoo management has already exhausted the patience of its largest, longest–suffering shareholders and [Microsoft’s] offer allows them to save some face," he wrote in a report to clients.

The rejection could set the stage for a drawn–out battle with Yahoo pushing for $40 a share. At least one group of shareholders will be pushing for a quicker resolution.

"I’m disappointed that it’s a flat rejection without an explanation for why Yahoo is so undervalued by the street or what their plan as a board is to better monetize these overlooked assets they have," said Eric Jackson, who heads a dissident group of Yahoo shareholders campaigning to sell their shares as a block. "I hope this is just bravado negotiation, not a serious consideration to go it alone. That wouldn’t serve shareholders."

jessica.guynn@latimes.com

About Marlin & Associates

Marlin & Associates (M&A) advised FMC’s CEO and largest individual shareholder. M&A is a specialized investment banking advisory and consulting firm providing transaction advice and services to middle–market firms in the media, technology, information and business services sectors. The firm is based in New York City and Washington DC.