February 15, 2008 2:59 PM PST

Top Yahoo shareholders could support Microsoft

Yahoo is calling on Microsoft to bump up its buyout bid, but the trouble is a number of the Internet giant's largest investors own shares in both stocks.

And, in a number of cases, Microsoft accounts for a larger slice between the two, which could dampen Yahoo's efforts to generate strong investor momentum in calling for a substantially higher price, according to a report released Friday by RiskMetrics Group. In effect, it's like asking these large investors to bid against themselves.

"This is the pressure that Yahoo is under," said Chris Young, RiskMetrics director of M&A research. "If the Yahoo investors owned fewer Microsoft shares than Yahoo, then the pressure would be different."

For example, Yahoo's largest investor, Capital Group's Capital Research Global Investors and Capital World Investors, managed 523.6 million shares of Microsoft, compared with 154.8 million shares of Yahoo, as of December 31.

And T. Rowe Price, which ranks among Yahoo's top-10 investors, owned 136.5 million shares of Microsoft compared with 22.8 million shares of Yahoo, during the same time period.

"Investors who own both Yahoo and Microsoft will probably support Yahoo asking for a sweetener (to the deal), but will probably tell Yahoo don't rake Microsoft over the coals."
--Chris Young, director of M&A research, RiskMetrics

According to RiskMetrics, 90 percent of all Yahoo institutional investors also own shares in Microsoft. And of this group, 15 of the top 20 Yahoo institutional investors own more Microsoft than Yahoo.

RiskMetrics, which also operates ISS Governance Services, provides proxy advice to 1,900 clients that range from pension funds to hedge funds to mutual funds.

Some investment firms, such as Fidelity, allow each portfolio manager to vote their fund's shares independently, rather than taking a companywide approach, proxy solicitors say. As a result, Fidelity could have one fund that is heavier in Microsoft vote one way on a merger, while another Fidelity fund votes differently.

The long-held theory in mergers and acquisitions is that fund families will vote their shares based on the net benefit they receive as a firm, Young said.

"Investors who own both Yahoo and Microsoft will probably support Yahoo asking for a sweetener (to the deal), but will probably tell Yahoo don't rake Microsoft over the coals," Young said.

Proxy solicitors expressed similar sentiments, noting that in the past two weeks since Microsoft launched its unsolicited bid for $31 a share, Yahoo investors who have duel ownership in the stocks have had time to assess the effect on their respective portfolios.

"The investors are very adept at playing both ends against the middle to extract the best value," said one proxy solicitor. "They're probably telling Yahoo to try to get the best offer you can, but let's not lose the deal."

Matrix Asset Advisors falls into that category. Matrix, which manages $1.6 billion in assets, has been a longtime holder of Microsoft shares and is a recent owner of Yahoo.

Matrix, which acquired Microsoft shares when it was trading in the mid-$20 a share range, cast an eye at Yahoo in January, purchasing 435,000 shares.

And while its Yahoo position falls short of its ownership in Microsoft, Matrix supports Yahoo seeking a higher price.

"Microsoft's current price is essentially fair. It gives Microsoft some wiggle room if they want to pay a little bit more," said David Katz, chief investment adviser for Matrix Asset Advisors. "We don't think Yahoo is worth $40 a share, but does it make sense at $33 to $35? Under the right circumstances, that would do right for all sides."

And while Microsoft's buyout bid has put pressure on its share price since it was announced, Katz said he believes that will be for the short term. He added that the software giant's share price will benefit in the long run with a Yahoo merger.

"We think the Microsoft board is focused on having a dominant franchise in the Internet search and ad space," Katz said. "This is where they have spent a lot of money but have not had a lot of traction. This is their best shot at becoming a meaningful player."

Yahoo is reportedly in talks with News Corp. and AOL. But Katz said he hopes Yahoo will ultimately do the right thing to help its value sooner rather than later. He noted the longer Yahoo remains in limbo, the more its value will be impaired.

Yahoo and News Corp. are reportedly discussing exchanging some of News Corp.'s assets, such as its popular MySpace.com and other Fox Interactive Media group Web sites, in exchange for a large investment stake in Yahoo, according to a report in The Wall Street Journal.

Some observers speculate that News Corp. might not be the only media company with an interest in Yahoo.

"I'm sure there are similar (discussions) in the offing with a few of the other big-media companies," a source close to the matter told CNET News.com when asked about the reported News Corp.-Yahoo talks. But the source suggested that they probably won't get in the way. It's "unlikely they amount to much, but there is something there."

As Yahoo and Microsoft evaluate the shareholder base of the Internet company, they will be taking note of who owns stock in both, how those shares are weighted, and how each of those respective investment firms tend to handle voting matters, such as on a fund-by-fund basis or by taking a firmwide approach, proxy solicitors say.

And once that analysis is completed, the tough task begins in assessing whether to raise a bid, launch a tender offer, or kick off a proxy fight for directors' seats, proxy solicitors said.

If they do a proxy fight or tender offer, it could be an eight-month battle, with Yahoo losing a number of employees, as well as a distraction for both companies, proxy solicitors say.

Said one proxy solicitor: "There is a time value of money."

CNET News.com's Caroline McCarthy contributed to this report.

See more CNET content tagged:
investor, Yahoo! Inc., M&A, shareholder, ownership


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Yahoo are dumb
I do not think Microsoft really needs Yahoo, but Yahoo desperately needs Microsoft.
If I would be Microsoft I would just let Yahoo die :)
Posted by alenas (181 comments )
Reply Link Flag
Agreed. Let Yahoo & Stock go down the tubes
Regardles of stock price (since speculation drives that out of whack) Microsoft should not pay a penny more if they buy it at all.

Personnaly I think that Microsoft is buying a dying company, despite what Jerry Yang says.

Yahoo has been losing value for a while now and it was interesting to see that the offer tendered by Microsoft raised Yahoo's stock value and lowered Microsoft's.

It doesn't take a rocket scientist to see that Yahoo need an infusion of capital in a bad way and a new direction, GET RID OF THE CURRENT BOARD!

On the other hand Microsoft's offer of (at the time) 62% premium over the stock value was that high over the stock value for a reason...So Yahoo would just say YES.

Instead Yahoo's executives and board of directors in their infinite wisdom and six figure salaries (that would end abruptly after a sale) decided that wasn't enough.


It's damned sure enough for the shareholders.

1. Microsoft should pull the offer, not buy Yahoo.
2. Microsoft needs to get a smart marketing team and start marketing their own branding with new twists.
3. Build many more datacenters throughout the world and make Microsoft the quickest at everything online. We are in a web-centric era and if it doesn't feel like to the user like it is running on their machine like a local app then it's not going to work.
4. Microsoft needs to offer "on the cheap" hosted exchange services in ALL of their datacenters. If the customer wants to buy the services then don't palce the occasional ad or banner in the email, otherwise offer ad supported EXCHANGE email.
That is one of your best products, make it available.

But in the end I think MS should just let Yahoo die.
Posted by fred dunn (793 comments )
Link Flag
Two more articles worth reading...
I'd recommend these two articles...

The Men Behind the Curtain: What's really happening in the proposed Microsoft-Yahoo merger.
<a class="jive-link-external" href="http://www.pbs.org/cringely/pulpit/2008/pulpit_20080208_004240.html" target="_newWindow">http://www.pbs.org/cringely/pulpit/2008/pulpit_20080208_004240.html</a>

Plan B: What if Microsoft doesn't really hope to buy Yahoo at all?
<a class="jive-link-external" href="http://www.pbs.org/cringely/pulpit/2008/pulpit_20080215_004309.html" target="_newWindow">http://www.pbs.org/cringely/pulpit/2008/pulpit_20080215_004309.html</a>
Posted by TV James (680 comments )
Link Flag
I support a $50 yahoo...
I'll sell my shares for $50 if you microsoft idiots are willing!
Posted by microsoft slayer (174 comments )
Reply Link Flag
How many shares do you own?
I'll give you $50 for them. Oh... wait... you weren't saying PER SHARE were you?

Someone would have to have a low opinion of the rest of the world and be pretty deluded about their own intelligence to make that kind of offer.
Posted by TV James (680 comments )
Link Flag
MS, Let Yahoo die a slow death.
Once Microsoft pulls it's bid for Yahoo the share price for Yahoo will go into the high teens ($18-$15/share).
The only thing that is shoring it up now is Microsoft's bid. Nobody else wants it.

Microsoft should get a top notch marketing firm to get their "Live" services known to more than just the techno-geek types.

Then start improving on the services based on demand and customer feedback. Finally BUILD MORE DATACENTERS and get some talented search analysts to spruce up up algorithm and differentiate it from all others.

That is a far better way to spend $44B.

Yahoo is in the tank. MICROSOFT DON'T BUY THEM! They are not worth the capital and your shareholders will thank you.
Posted by fred dunn (793 comments )
Reply Link Flag

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