Yahoo board likely to reject takeover

The Baltimore Sun

SAN FRANCISCO -- Yahoo Inc.'s board of directors plans to reject Microsoft Corp.'s week-old $44.6 billion takeover offer, a person familiar with the matter said yesterday, marking the latest move in a chess match over the future of the Internet pioneer.

Yahoo's board plans to notify Microsoft formally in a letter tomorrow that it has determined that the $31 a share price takes advantage of a recent slump in the stock, fails to reflect the true value of the company and neglects to offset the risk to Yahoo if regulators overturn the merger, the person said.

"The reward has to match the level of risk," Oppenheimer & Co. analyst Sandeep Aggarwal said.

The Redmond, Wash., company now must decide whether to sweeten its bid or pursue a hostile takeover by overriding Yahoo's board.

Yahoo declined to comment yesterday. Microsoft did not respond.

Microsoft has been prepared to raise its price, if necessary, according to a person who spoke with Chief Executive Steve Ballmer last week. Ballmer told this person that he wanted to get a deal done before the administration changes in the U.S. and European Union, which could make it more difficult to receive regulatory approval for big mergers.

"Obviously the million-dollar question is: Is this just a negotiating ploy or is it the real thing?" said Anthony Valencia, media and entertainment analyst for TCW Group in Los Angeles.

Despite investors' impatience with the company, the bid in fact might undervalue Yahoo, Valencia said.

Moreover, the half-cash, half-stock bid has dropped in value to $29.08 a share because Microsoft's stock has tumbled since it made its offer public Feb. 1.

Analysts anticipated that Yahoo would attempt to wrest a higher bid from the world's largest software maker, even though no other bidders have emerged.

They say Microsoft probably is willing to offer as much as $36 a share. That was reflected in Yahoo's stock price, which rose 16 cents to $29.20 Friday in Nasdaq trading, above the value of the cash-and-stock offer. Yahoo shares traded as high as $31 as recently as November.

Yahoo is angling for as much as $40 a share, analysts say, an increase of about $12 billion to the offer. That might drive Microsoft's share price even lower.

"Bottom line, Microsoft will have to work a little harder and pay a little more, but at the end of the day, I am still convinced that this is a deal that happens," said Scott Kessler, an equity analyst with Standard & Poor.

Many senior executives at Yahoo believe a deal with Microsoft is inevitable, said a former executive who requested anonymity.

"I am pretty sure, if they can get the offer up into the mid-30s, they'll take it," the person said.

But, by spurning Microsoft, Yahoo risks further alienating shareholders upset about management missteps that have led to five consecutive quarters of declining profits.

The downturn caused Yahoo's stock price to plummet by more than 40 percent, erasing about $20 billion in shareholder wealth, in the three months leading up to Microsoft's bid.

Led by company co-founder and board member Jerry Yang, Yahoo will now be under intense pressure to lay out a strategy that will prevent its stock price from collapsing again. What's more, Yang and the rest of the management team must persuade Wall Street that they can boost Yahoo's market value beyond Microsoft's offer.

This isn't the first time that Yahoo has spurned Microsoft. The Redmond, Wash.-based company offered $40 per share to buy Yahoo a year ago only to be shooed away, according to a person familiar with the matter. The person didn't want to be identified because that bid was never made public.

The decision to reject Microsoft, which was reported first by The Wall Street Journal, came out of a Friday board meeting in which directors conferred by phone. They heard presentations from Yahoo's management and bankers, who argued the company was worth more than the Microsoft bid. They also reviewed other options.

Microsoft is expected to try everything it can to avoid a hostile takeover that could increase the odds of regulators opposing the combination. Yahoo has so-called "poison pill" provisions but not a staggered board.

"This is likely to be a long, drawn-out process," corporate governance expert Patrick McGurn said.

Jessica Guynn writes for the Los Angeles Times. The Associated Press contributed to this article.

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