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Microsoft's Ballmer Sets Deadline for Yahoo

Reuters
Saturday, 5 Apr 2008 | 2:34 PM ET

Microsofton SaturdaygaveYahooa deadline of three weeks to make a decision on its "generous offer" of $31 a share in cash and stock or else it will launch a proxy fight to win investor support.

Steve Ballmer
AP
Steve Ballmer

In a letter sent to Yahoo's board, Microsoft CEO Steve Ballmer said, "now is the time" to negotiate final terms of a deal, one that would mark the biggest-ever takeover in the high-technology industry.

Read the full text of the letter.

"If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors,'' Ballmer wrote.

Then, he threatened to reduce Microsoft's offer if Yahoo failed to meet the deadline: "That action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.''

The letter represents the tightening of the noose in a classic Wall Street takeover bear-hug strategy, wherein Microsoft aims to convince Yahoo's board to negotiate a friendly merger deal or else face a battle to defend their jobs at Yahoo's next annual meeting.

"Yahoo is playing a dangerous fiduciary game and at this point I can't see how this deal doesn't get done," CNBC's Silicon Valley Bureau Chief Jim Goldman said. "Yahoo has no other deal on the table, Microsoft is offering a hefty premium, and sticking your head in the sand isn't going to make this hostile bid just go away."

Yahoo's board is reviewing the letter, said a person close to the company. Directors of the Sunnyvale, California-based company have rebuffed Microsoft's original offer, saying the bid undervalues Yahoo and that it is seeking alternatives.

Ballmer said Microsoft is growing impatient more than two months after the Redmond, Washington-based software behemoth made its unsolicited takeover offer for Yahoo. At that time, the bid represented a 62 percent premium to Yahoo's share price.

"Steve Ballmer is an emotional guy and the emotion comes through and it's frustration," said Kim Caughey, senior analyst at Fort Pitt Capital Group, a Microsoft shareholder. "I really don't think it's going higher than $31. That ship has sailed."

The Microsoft letter argues that the economy and the market for Internet stocks have deteriorated in the intervening period, and that Yahoo's share of Web search and online advertising business has declined, referring to industry market reports.

"During these two months of inactivity, the Internet has continued to march on, while the public-equity markets and overall economic conditions have weakened considerably,'' Ballmer wrote.

The deadline falls on April 26, four days after Yahoo and two days after Microsoft report their quarterly results.

Ballmer said Yahoo's board, despite its efforts, had failed to woo a competing offer from "others in the industry."

Yahoo has held talks with News Corp. and Time Warner's AOL division about possible deals, but these discussions appear to have yielded no alternatives yet.

A Yahoo investor, whose firm met with Yahoo management earlier this week and declined to be identified, said the company emphasized the deal with Microsoft involved regulatory risks that would undercut a merger's potential value.

The management, according to the investor, presented alliances with AOL and Google as possibly better options.

Brendan Barnicle, who follows Microsoft for Pacific Crest Securities, said that by removing the hope of a higher bid, Microsoft had given Yahoo directors the legal cover to accept Microsoft's existing offer and fend off shareholder lawsuits.

It's part of a highly choreographed dance and parallels the take-it-or-leave-it bidding strategy Oracle Corp has used to win a string of deals to consolidate the software industry.

"The big overhang on Microsoft stock has been that they would have to raise their bid," Barnicle said.

Meanwhile, Yahoo has adopted measures that make a merger with Microsoft more costly, Ballmer complained.

A few weeks after Microsoft's offer, Yahoo's board put in place a generous severance plan, commonly known as a "golden parachute," to all employees if the company was sold. Part of Microsoft's justification for the deal was that it expected to wring out $1 billion in cost savings.

The original 62 percent premium to Yahoo's share price on the day the offer was announced has fallen along with Microsoft's stock price, which has taken a hit from declines in the U.S. stock market and skepticism about whether Microsoft's unsolicited bid will succeed.

Yahoo shares plunged nearly 5 percent in after-hours trading Friday following news that Microsoft was re-evaluating its offer. In regular trading, Yahoo stock closed Friday at $28.36, while Microsoft ended the week at $29.16. Both trade on Nasdaq.

Based on Friday's closing price, the premium to Yahoo's stock is around 45 percent, while the current total value of Microsoft's offer is $42.2 billion in cash and stock.

Microsoft has argued that the offer's premium to Yahoo's stock has, in fact, increased, because the Web pioneer's stock would have fallen in lock-step with its online rivals. Shares of Google , Yahoo's most direct competitor, has fallen more than 16 percent since Microsoft's offer.

Microsoft's view of business conditions at Yahoo runs contrary to Yahoo's own outlook for itself. Last month, the company went public with a rosy revenue outlook for the next two years and appealed directly to shareholders during a road show that Microsoft's offer is not enough.

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