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For Yahoo Board, Microsoft Deal May Be a Duty

Yahoo'sboard seems to be looking for any way possible to escape takeover by Microsoft, but in the end directors' duty may be simply to take what the software company offers.

Exterior view of Yahoo! headquarters in Sunnyvale, Calif.
Paul Sakuma
Exterior view of Yahoo! headquarters in Sunnyvale, Calif.

The pioneering Web company may be known for its fun-loving culture where employees refer to each other as "yahoos", dress in loud purple-and-yellow T-shirts and harbor a deep Silicon Valley-bred distrust of rival Microsoft's corporate culture.

But Yahoo's 10-member board is far from being some band of Microsoft-hating ideologues that would block a deal with the world's largest software company at any price.

Most of the board directors at Sunnyvale, California-based Yahoo are drawn from the mainstream of American corporate life, including executives and entrepreneurs from fields such as advertising, airlines, supermarkets and radio.

And in a world of heightened focus on corporate boards, directors are under clear pressure to seek the best deal for shareholders, suggesting their fiduciary responsibility will prevail over any bet-the-farm strategy to remain independent.

"You can't say 'No' to Microsoft's offer based on some intangible vision," said Clayton Moran, an analyst with Stanford Group in Houston.

Microsoft's original cash-and-stock offer of $44.6 billion, or $31 per share, was a more than 60 percent premium to Yahoo's stock price. The offer value has since shrunk to about $42 billion -- still a substantial premium.

Wall Street has grown convinced that Microsoft's price is an insurmountable hurdle to would-be rivals and that the search for alternatives by Yahoo's board is basically designed to exact a higher offer from the Redmond, Washington-based giant.

"Doing some alternative deal is almost sure to be of less value to shareholders," Moran said. "You would see all sorts of lawsuits -- and they would be lawsuits with merit."

A spokeswoman declined to comment on the board's activities beyond a statement Monday rejecting Microsoft's bid as too low: "Yahoo's board is carefully and thoroughly evaluating all of the company's strategic alternatives and will pursue the best course of action to maximize long-term value," it said.

Despite discussions, according to sources, of tie-ups with other companies from Google to News Corp , Yahoo's directors are not tech radicals who will attempt to go it alone at any cost.

"One way Yahoo has grown up is that they have created a pretty good corporate board," said a local recruiter who has performed a variety of executive search assignments for Yahoo and is familiar with the dynamics of the directors.

"The average age is 55, which is typical for many corporate boards, but old for Silicon Valley," the recruiter said. "There is not a lot of next-generation thinking there."

Personal Links to Microsoft

Even directors drawn from the tech world like venture capitalist Eric Hippeau, one of the first institutional investors in Yahoo, and Robert Kotick, head of video game company Activision, have ties that suggest they won't oppose a Microsoft deal.

A key driver of Activision's business is selling gaming titles for Microsoft's Xbox gaming console, accounting for one-third of its latest quarter's software publishing sales.

In a curious twist, Hippeau was on the board of Danger Inc, makers of an innovative hybrid Web and phone device, that agreed to sell the company to Microsoft in a smaller-scale deal for undisclosed terms announced this week. Hippeau was aboard a plane and could not be reached for comment.

Another Yahoo board member, Citizens Communications Chairman and Chief Executive Maggie Wilderotter, was a former senior vice president at Microsoft's public sector business, selling the company's software to government agencies.

"It is quite a capable and experienced board. Its composition and collective experience suggests the directors have an active interest in doing what's best for shareholders," Sanford C. Bernstein analyst Jeffrey Lindsay said.

"There should be no real surprises," Lindsay said. "They are just exercising their responsibility as board members." He predicts the sale of the company at a modestly higher price.

Both sides are working from well-rehearsed scripts performed in dozens of unsolicited takeovers in the past. Goldman Sachs, Lehman Brothers and Moelis & Co are working as financial advisers to Yahoo; Skadden, Arps, Slate, Meagher & Flom is Yahoo's legal adviser. Munger Tolles & Olson is acting as counsel to Yahoo's outside directors.

Jeffries & Co analyst Youssef Squali expects a drawn-out process in which Microsoft ultimately prevails by sweetening its bid by another $2 to $3 per share. But he warns against board brinkmanship in pursuing a goal as high as $40 a share.

"The risk of derailing a deal at the end of the day can prove dangerous ... considering that a 'no deal' scenario would send the stock back below $20 quickly," Squali wrote in a research note to clients, published Thursday.

The board has days or weeks to decide. A month from now, nominations for board members are due for Yahoo's annual shareholder meeting. Microsoft could turn hostile and nominate its own candidates as a way of winning support for its deal.

"If they unreasonably drag it out, Yahoo board members would be subject to criticism," Lindsay said.

Moran was more blunt: "Regardless of their personalities, they really have a pretty clear responsibility to the shareholder -- and potential (legal) liability if they don't do what's right."