Yahoo rejects Microsoft's bid

update Yahoo on Monday announced that it is rejecting Microsoft's multibillion-dollar buyout offer, saying that it undervalues the company.

The announcement had largely been expected, as reports emerged over the weekend such a decision had been made by Yahoo's board of directors.

"Yahoo's board of directors has carefully reviewed Microsoft's unsolicited proposal with Yahoo's management team, and financial and legal advisers, and has unanimously concluded that the proposal is not in the best interests of Yahoo and our stockholders," the company said in a statement Monday.

"After careful evaluation, the board believes that Microsoft's proposal substantially undervalues Yahoo, including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow, and earnings potential, as well as our substantial unconsolidated investments," the company further noted.

Yahoo said its board will continue to evaluate its strategic options and pursue a path to "maximize value for all stockholders."

"It is unfortunate that Yahoo has not embraced our full and fair proposal to combine our companies," Microsoft said in a statement Monday. "Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties," the company statement said.

The software giant reiterated its stance that it "reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value" in its proposal.

Microsoft, which on February 1 offered a cash-and-stock deal initially valued at $44.6 billion, is likely to already have contingency plans, such as attempting to create a board of directors that would be friendlier to a Microsoft deal, said proxy solicitors.

Yahoo's annual nomination process for board elections is set to start Wednesday and run through March 14, according to a U.S. Securities and Exchange Commission filing. Each year, all 10 of Yahoo's board seats are up for grabs.

If Microsoft walked away from its offer, where do you think the stock would go?

--Kevin Landis,
chief investment officer,
Firsthand Capital Management

Microsoft may already be eyeing those seats.

"If they haven't done it already, they're in the process of assembling an appropriate slate," said Bruce Goldfarb, a veteran proxy solicitor. "It's fair to assume they will run for board seats, and it won't take them long to fill the slate. We're talking Microsoft here. They have resources and access to countless high-quality candidates to be a director."

Should Microsoft move forward in launching a proxy fight, it's difficult to say whether it will stake its flag early in the four-week window or wait closer to March 14. Timing is based on the state of negotiations, as well as the personalities who are pushing for a merger, Goldfarb said.

"By launching it early, it says, 'We're serious and ready to go. The pressure is on, and we can always pull back, but know we are there,'" Goldfarb said, adding, "Personality is always a factor in a proxy fight decision. It has a strong effect on how a decision is made."

Should Microsoft launch a hostile bid for Yahoo, one proxy solicitor said, it's likely that Yahoo will go to the Department of Justice and lodge complaints over antitrust issues related to a merged company.

Special coverage
Yang's e-mail to Yahoo staff

CEO Jerry Yang sends his troops an e-mail explaining how Microsoft's bid "substantially undervalues Yahoo."

In the current regulatory environment, Microsoft may surmise that its merger proposal will not be blocked. But Microsoft is also aware that the situation could change after national elections this fall, according to a proxy solicitor who requested anonymity.

Similar measures were taken by PeopleSoft, which nearly five years ago found itself the takeover target of a hostile bid by Oracle.

Although the Department of Justice stepped in and filed a lawsuit to block the merger, the agency was ultimately overruled by a federal judge in San Francisco. The 18-month saga eventually ended in late 2004, when PeopleSoft accepted Oracle's offer, valued at $10.3 billion.

Yahoo's institutional investors are eyeing Microsoft's offer and weighing their options. Should the software giant prevail--either through a proxy contest or tender offer--and a vote is put to Yahoo shareholders, one institutional investor said he would probably take the money.

"They're offering a lot more than the market was willing to pay before their offer. If Microsoft walked away from its offer, where do you think the stock would go?" said Kevin Landis, chief investment officer of Firsthand Capital Management, which manages more than $600 million in assets.

Firsthand's Yahoo stake amounts to more than 300,000 shares, of which half are held in its flagship Panama search-advertising platform in late 2006; its ownership stake in Chinese business-to-business site Alibaba.com, which had a tremendous IPO on the Hong Kong exchange in November; Yahoo's balance sheet; and its "reasonably" priced stock, Landis said.

Although Yahoo's stock has underperformed during that time, Firsthand has largely maintained its ownership stake in the company. But Landis said he would probably take Microsoft's money, if given a chance.

One thing that Landis, as well as other institutional investors would have to contend with if they own both Yahoo and Microsoft, is what to do with their Microsoft position.

Firsthand has owned Microsoft shares for years, although it's a smaller stake than its Yahoo holdings. Landis, as well as other similarly situated investors will have to consider whether to sell off some of their newly inherited Microsoft position, should a deal go through, or increase the percentage of Microsoft shares in their portfolio.

"Microsoft is already pretty much where we want our position," Landis said. "There could be some selling pressure on Microsoft, but all the (arbitragers) have figured that out."

Since announcing its Yahoo bid, Microsoft's shares have fallen roughly 14 percent, to about $28 this morning.

Cambiar Investors is one Microsoft shareholder that liquidated its holdings after the Yahoo buyout bid news.

"We...liquidated on the news," said Brian Barish, Cambiar president. "Microsoft knows even less about the Internet than Yahoo. I can't see how they can make the business better."

[deepanjan_nag]

Points 2 Ponder

This was expected, but I reckon Yahoo! is only delaying the inevitable.



Here's what bothers me the most. Yahoo! servers run on FreeBSD, a rock-solid flavour of Unix. Well, Hotmail did too, until Microsoft gobbled it and changed it to Windows. It's another matter that the transition didn't happen overnight. If Microsoft devours Yahoo!, there's little reason to believe that FreeBSD will continue to have a free run. New services will be launched on Windows and old ones, when upgraded, will inch away from FreeBSD.



The Java guys in Yahoo! would feel like an endangered species, mass exodus would ensue and Microsoft would be hard-pressed to replace them. Other employees, disgruntled by the identity crisis, would follow suit.



Of course, this is just one of the possible scenarios and I hope it never happens. I have nothing against Microsoft per se, but I fear Yahoo! wouldn't be Yahoo! anymore if Microsoft owns it. The Redmond giant should begin to embrace the heterogeneity of the Internet before others cut it to size.

[Peter Bonte]

Human assets

Yahoo is content more than technology, Google can pick the best employees and part of the board to start a competing service. Its
easier to quickstart when the expertise can be moved in block from
Yahoo to the new service.

[gggg sssss]

memo to staff - start learning VB

If the board and existing employees had ANY clues as to acheving the "values" they think Yahoo has, they would have put them in place last year, the year before or the year before. I assume they are all sharehlders - take the money - you will never get any more for it. Remember Altavista. Remember AOL. Remember webVan. And start learning VB.

[bob1960]

Microsoft should just walk away.

Everybody has said how uncharacteristic this merger is for Microsoft. However, kicking the knees out of a company is not so far from the mark. If Microsoft walks away now, Yahoo! is doomed to have it's shares drop like a rock, law suits from shareholders, and an easy mark for another company to buy them out. In any case, Microsoft's position in Search improves with Yahoo! out of the way.

Now if only Apple would then step in and snap up Yahoo! at a cheap price and fuel it's open source Web-based systems with capital. It would give Apple a leg up in the trend toward Web-centric systems, while still letting them design sexy hardware/software clients that is does so well...

[sadchild]

how to be micro$oft lesson one

how to be micro$oft lesson one...

step one: offer billions for yahoo
step two: get rejected by all 10 board memebers
step three: fill yahoo board of directors with pro-m$-buyout people
step four: buy yahoo anyway

[bridge solution]

How to be Yhoo, lesson 1

1. Continue to be "me too" on adding stickiness while continuing to devalue the signal to bling ratio.
2. Go from being larger than General Motors (back in 99..market caps compared).
3. Keep people from noticing, for a while, that most of the operating cash came from cds in the bank, provided by people buying t-shares based on perceived future value.
4. When people begin to think you are matured enough conmpany that a p/e over 50 isn't really a value, keep talking about "next year"

[Imperfect Nerd]

Big Brother--Little Brother?

Who would be swallowing who, is the question, and will the market be the one to get indigestion if it happens? I use Yahoo with a PC that runs Windows. It has a chip by Intel. It was manufactured by Compaq. I like being able to choose the combination of these factors that suits me. One day soon, if regulations remain loose, we all will be captives of one entity, BigBadComputer.com. We will probably be able to talk to it and it will talk back in a commanding voice while watching us thru a built-in webcam.
No, wait...that was "1984"...nevermind!

[Llib Setag]

Becoming MS - Step 2

IF you cannot innovate...imitate.
IF that fails, then open wallet & buy the competition ("threat") outright.
IF that fails, then copy the competition & bankrupt them in court after they try to suit you.
IF that fails, then hostel take over corporate raiders brown boots charge in & take it from them.

Extend / Embrace / Extinguish
MS : Where do you want to go today?

[oxtail01]

no wonder Yahoo in trouble

Let's see - their stock price was around $19 and sinking with no real hopes of getting it back up substantially. It jumps to $29 with Microsoft's offer but Yahoo board states it doesn't fully value their worth? With this kind of math, they're doomed.

[JCPayne]

Glad to see Yahoo not DUMB enough to fall for

such a dumb merger. Let Microsoft go rot in their own corner. THANK YOU YAHOO!!! Mission Accomplished!!!!

[JCPayne]

Yahoo stock right now higher than Microsoft's. OUCH.

....

[riffkind]

you'd better bet ...

... that YHOO shareholders will help make it happen too.