Microsoft to Launch Proxy Fight with Yahoo

null|The New York Times

In an escalation of its fight for Yahoo, Microsoftwill authorize a proxy fight at the Internet company this week, people briefed on the matter told DealBook.

Bill Gates

Unless Yahoo quickly reverses course and enters into talks, Microsoft would then seek to nominate a slate of directors to Yahoo’s board by March 13, the final deadline for nominations, and pursue a lenthy campaign to oust the board.

The move, expected to cost about $20 million to $30 million, was Microsoft’s alternative to raising its $44.6 billion bid and is seen as a less expensive way to put pressure on Yahoo’s board. Yahoo rejected Microsoft’s original offer as undervalued.

It is only the latest twist in one of the biggest Internet takeover battles in recent years. Since unveiling its aggressive offer, Microsoft has hinted that it would pursue all avenues to lock up Yahoo as it races to catch up to Google.

As the software giant’s stock has fallen 12.8 percent since announcing the offer two weeks ago, so has the nominal value of the deal, to about $41 billion. Many Yahoo shareholders, including Bill Miller of Legg Mason, have said that Microsoft must raise its bid to strike a deal.

But raising the $31-per-share offer would cost Microsoft an additional $1.4 billion for every dollar added.

"We sent them a letter and said we think that’s a fair offer. There's nothing that's gone on other than us stating that we think it's a fair offer," Bill Gates, Microsoft’s chairman, told The Associated Press on Monday. "They should take a hard look at it."

By contrast, waging a proxy fight to oust Yahoo’s directors is comparatively cheaper. Much of the cost involves the hiring of a proxy solicitor and preparing mailers for Yahoo shareholders.

Furthermore, Yahoo’s board is vulnerable in a proxy fight. As The Deal Professor has remarked previously, Yahoo does not have a staggered board, so all of its directors are up for nomination this year. And, per section 3.3 of the by-laws, in a contested election, directors are elected by a plurality of votes cast.

DealBook and The Deal Professor have noted previously that Microsoft’s aggressive approach has long left the door open to this move. But some observers said that the software company would prefer a friendly deal, especially given the possibility of Yahoo employees leaving en masse if a bitter takeover fight erupts.