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Microsoft Expected to Make Hostile Bid for Yahoo

An overwhelming majority of Wall Street analysts see Microsoft preparing shortly to launch a hostile bid at its current price of $31 per share in cash and stock, a Reuters poll found.

CNBC.com

Most Wall Street analysts believe Microsoft now faces a drawn-out proxy campaign to win its unsolicited takeover of Yahoo, according to the poll.

By contrast, the general view in February when Microsoft announced its offer was that Yahoo would agree to a friendly merger if Microsoft only sweetened its bid. By mid-March a Reuters poll showed that Wall Street expected Microsoft to buy Yahoo without raising its price.

Microsoft last week repeated Chief Executive Steve Ballmer's 3-week-old threat that his company will go hostile, or even call off its bid, if Yahoo did not agree to a deal before this weekend. Microsoft executives said they will reveal their next move this week.

"I'm betting that Ballmer is bluffing with his 'walk away' comments and that he's going hostile," said Jefferies & Co analyst Youssef Squali, who believes Microsoft will stick with its current $31-per-share offer.

Nineteen brokerages now say they expect Microsoft in coming days to move forward with a hostile bid after being frustrated in a three-month effort to entice Yahoo to reach a negotiated deal, the survey reveals.

By contrast, only three brokerages see the possibility that the two sides will end their standoff over price and begin negotiations to reach a deal at a slightly higher price than the initial offer, which had been worth $31 per share in cash and stock, or $44.6 billion.

Due to a drop in Microsoft stock, it is now worth $42.7 billion.

Another three Wall Street houses see Microsoft walking away rather than raising its offer. Many Microsoft shareholders fear a higher-priced deal would dilute the value of their shares and have an uncertain payback.

"There are times when the best deals are those that aren't done," Dinosaur Research analyst David Garrity wrote in a research note to investors Friday. Nonetheless, he expects Microsoft to begin a proxy battle to unseat Yahoo's board.

Were Microsoft to walk away, Garrity estimates Yahoo's stock could drop around 14 percent to $23 a share, while Microsoft's stock might jump about 17 percent to $35 a share.

The two companies are in a standoff over price. Yahoo has said last week it remained open to a Microsoft merger, but the current offer "substantially undervalues" the company and it continues to explore alternative deals.

Fourteen brokerages say they expect Microsoft to begin a campaign to unseat Yahoo's board and encourage the company's shareholders to accept its current $31 bid. Another five brokerages expect Microsoft going hostile at a lower price.

To counter Microsoft, Yahoo has held talks with Time Warner on a deal to merge Yahoo with Time Warner's AOL unit in return for Time Warner taking a stake in Yahoo, several sources familiar with the negotiations said earlier this month. A Yahoo-AOL tie-up would be part of a three-way deal in which Yahoo may partner with rival Google to use Google's advertising system to sell ads alongside Web search results Yahoo serves up to its users, these sources said.

Yahoo executives told investors on a quarterly conference call last week it was "premature" to discuss whether a trial run of the Google ad partnership will lead to a deal between the two companies, but declined to comment on progress Yahoo is making on a deal with AOL or other alternatives to Microsoft.

Long-Term, Deal Gets Done

Despite pessimism, the two sides can resolve their near-term disagreements, most analysts agree that, in the long run, Microsoft will find a way to get the deal done.

"It's in neither Microsoft's nor Yahoo's interest for this bid to go hostile given that could increase the integration challenges over time so it's our hope that the two companies come to mutually agreeable terms," said Andy Miedler, an analyst with Edward Jones.

He rates Microsoft stock as neutral, which means he expects its shares to perform in line with the broad market.

Microsoft sees buying Yahoo as critical to compete with arch-rivalGoogle, which dominates the market for Web search and related advertising.

Citi analysts Mark Mahaney and Brent Thill hold out for the idea that Microsoft must eventually raise its offer "at a somewhat higher price" than $31 a share to get a deal done.

"Microsoft seems too committed to walk away.Yahoo's board would be hard-pressed to turn down a sweetened bid," Citi wrote in a research note Friday, entitled "There Is NO Plan B."

Stanford Group analyst Clayton Moran says the heated rhetoric coming from both camps represents negotiating tactics aimed at getting the other side to blink, then come to terms.

But in a research note published late last week, he argued Microsoft has other options instead of buying Yahoo, although each has its own set of trade-offs in terms of value to Microsoft and its ambitions to a bigger Web rival to Google.

AOL's Internet media and advertising assets represent the closest thing to Yahoo and would significantly enhance Microsoft's Web audience, he said. Microsoft has reportedly talked with News Corp, owners of the MySpace social network, about a joint bid for Yahoo, but Moran believes MySpace is less promising than Facebook, albeit one that is unlikely to sell at a price Microsoft would be ready to pay.

The Reuters poll drew responses from 17 Microsoft analysts and 15 Yahoo analysts from 25 different Wall Street brokerages. It was conducted on Friday, a day before Microsoft's 3-week-old deadline expired for Yahoo to reach a deal.

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