Updated at 6 p.m. PDT with comments from an institutional investor.
Microsoft on Saturday issued an ultimatum to Yahoo, giving the Internet search pioneer three weeks to enter formal merger negotiations and conclude a deal.
The software giant threatened to launch a proxy fight to unseat Yahoo's board of directors, as well as take its case straight to Yahoo investors should no deal be reached in that period.
And as a further cattle prod in getting a deal consummated, Microsoft threatened to lower its existing bid, citing how Yahoo's value will be hurt if it needs to resort to such hostile means.
"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 for the Yahoo board," Steve Ballmer, Microsoft chief executive, stated in his letter to Yahoo's board of directors. "The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, 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."
Microsoft initially offered an unsolicited buyout bid of $31 per share for Yahoo back on February 1.
Microsoft's big bid for Yahoo
Since its initial offer, executives from both companies met four weeks ago for the first time to discuss the merger and once again last week with no results of moving it into formal talks.
Yahoo's board is expected to discuss Ballmer's letter next week, as well as provide a briefing on how talks between the two companies went last week, one source said.
Ballmer's letter is no slam dunk in driving Yahoo to formal talks. Yahoo, which already rejected Microsoft's initial offer as too low and one that undervalues the company, is leery of entering formal talks without assurances Microsoft's bid will be higher.
"We could enter formal talks and they might increase the bid, or they might not," the source said, noting opening their financial books to the software giant may make little difference. "Our books are already open. We're going to report our earnings in a couple weeks."
Yahoo, meanwhile, is cognizant that Microsoft wants to get the deal done and past federal antitrust regulators, otherwise called the Department of Justice (DOJ), while President Bush is still in office, the source said.
One former high-level antitrust attorney with the DOJ, who is now in private practice, said it usually takes six to eight months to move a deal through the DOJ. There is approximately eight months left before Bush's term ends.
Meanwhile, another source noted back in early March that Microsoft has its opposition slate of directors for Yahoo all ready to go.
The opposition slate would move to unseat Yahoo's 10 directors at the next annual shareholders meeting. Should Microsoft take such action and prevail, it's likely the opposition slate would vote to remove Yahoo's "poison pill," which makes it prohibitively expensive to acquire the company. A poison pill floods the market with additional shares of a target company, should a hostile bidder acquire too many shares of a company's stock.
Ballmer, in his letter, indicated that Microsoft would ask Yahoo investors to tender their shares to the software giant, which would park them until it could get its opposition slate elected. While Microsoft would not be able to gain control of Yahoo by taking that measure, it will send a clear message to Yahoo if enough of the Internet company's investors side with Microsoft. Basically, it would show Yahoo how successful Microsoft would be in getting its opposition slate of directors elected, when those investors are asked to vote on Yahoo's new board.
Yahoo should brace itself for an onslaught of investor wrath come Monday.
One large institutional investor is planning to call Yahoo's independent directors and management on Monday.
"I'm not happy with how Yahoo has handled it. I think they've bungled it while Microsoft has played it pretty well," the investor said. "I like that (Microsoft) has put a clock on this. I previously told Yahoo's independent directors that if they didn't move forward with this, I might support a new board."
And while this investor had a brief thought of banning together a group of major Yahoo investors to make a public statement in support of Microsoft's bid, the institutional investor noted that there would be a number of filing hoops to go through with the Securities and Exchange Commission. He noted a more likely scenario will be for institutional investors to make individual statements.
The investor previously advised Yahoo to move forward and fast in doing a deal with Microsoft, given the changes in January with a new administration in the White House and in the European Union. He also advised Yahoo's management to ditch the idea of doing a roadshow with its three-year strategic plan, and instead spend the time getting a deal in place.
"We all think Microsoft should pay more for Yahoo and, if it is handled right, Microsoft will likely pay more," said the major investor, who thought $34 to $35 per share is a good range.
The investor added: "Microsoft has to do this deal. The paradigm is shifting away from their core business to the Internet. They've already spent billions of dollars but haven't gotten it right. This is such a logical deal for them to do."
Microsoft and Yahoo executives took another run at trying to ignite formal merger talks this week, but failed to kick it into gear, according to a report in The Wall Street Journal.
Apparently, Microsoft says no dice to raising its buyout bid and Yahoo remains hesitant to open its books without a bump up in price, according to sources cited in the Journal.
Microsoft's big bid for Yahoo
Although it's unclear which executives are doing the merger dance, the meeting was held near Yahoo's headquarters, the report states.
The parties last talked four weeks ago, marking the end of what had been six weeks of silence since Microsoft threw out its unsolicited buyout bid valued at $31 a share at the time.
Yahoo later .
But maybe Yahoo should have been sitting in on a presentation Thursday at Tulane University Law School by Mark Shafir, one of the top merger and acquisition chiefs at Lehman Brothers--an investment bank that is also representing Yahoo alongside Goldman Sachs as it sorts through its options.
According to the Journal's Deal Journal blog, Shafir had a few dire predictions about the state of large merger and acquisition deals.
"We don't see access to capital for large deals any time soon," Shafir is quoted saying in the report. "Credit is difficult even for the very well-heeled folks."
That may put a damper on white knight scenarios of an outright acquisition for Yahoo, outside of the Microsoft offer.
Shafir, according to the report, also noted that M&A deals are expected to skid to $2.7 trillion this year, compared with $4.2 trillion last year. And strategic buyouts, like the one Microsoft wants with Yahoo, are expected to plummet by approximately 30 percent. Ouch.
Venture capitalists, meanwhile, are also bracing for a dour economy, notes CNET News.com Stefanie Olsen in her blog.
Yoo-hoo Yahoo, what do you think?
Microsoft's quest for Yahoo may come under increasing pressure this month, as time ticks away to get a deal done and past antitrust regulators, before President George W. Bush exits stage left, said proxy solicitors and investment bankers.
That's because it typically takes anywhere from six to eight months to move a merger deal through the Hart-Scott-Rodino process and beyond, said one former, high-level antitrust attorney with the Department of Justice, who is now in private practice.
A spokeswoman for the DOJ noted that while the agency has previously stated it would be interested in looking at a Microsoft-Yahoo deal should one occur, the time it takes to review mergers ranges widely.
Microsoft's big bid for Yahoo
And although one source familiar with Microsoft's efforts to acquire Yahoo said the software giant doesn't have any internal deadline for snaring the Internet search pioneer and there is no clear correlation between the party in power and nixed mergers, Microsoft, nonetheless, may be watching the clock and doing the backward math, say proxy solicitors and investment bankers.
President Bush, who is on his way out come January 20 when a new president is inaugurated, has largely been good for Microsoft in the antitrust arena--at least in comparison to the its treatment from European antitrust regulators.
And should Microsoft be watching the clock, that bodes well for Yahoo.
Yahoo's stock price is beating a little stronger these days. And that rise was not necessarily driven by the full onslaught of the company's big, splashy, three-year financial game plan unveiled two weeks ago, say several hedge fund managers.
Rather, the 12 percent share price increase over the past fortnight may stem from Yahoo's quiet notation in that financial game plan that the company's first-quarter performance is expected to fall in line with Wall Street's current assessment.
"Their stock price has risen, not because of their plan, but because they reaffirmed their first-quarter guidance," said one hedge fund manager. "Investors were scared that if they puked on their first-quarter performance, Microsoft would lower its bid or not bump it up."
Microsoft is still biding its time on a buyout offer for Yahoo initially valued at $31 a share.
Yahoo on Monday closed at $28.93, up 12 percent from its closing price the day before it unveiled its financial plan--and first-quarter guidance reconfirmation--two weeks ago. That's a pretty sizable pop, compared with the Nasdaq, which climbed 4.7 percent during the same period.
Another hedge fund manager said rumors on the Street last week were suggesting Microsoft might offer anywhere from $34 to $36 a share for Yahoo, and there was talk that the Redmond giant would be willing to offer an all-cash buyout of $34 a share.
Meanwhile, investment bankers and proxy solicitors say Yahoo is likely done with its intelligence gathering--er, make that investor road show presentations. They note that companies can usually get a good feel within two weeks which way investor sentiment is leaning, be it a hostile merger proposal, an IPO, etc.
"Some investors will be blunt, some will say let me think about it, and some say nothing," said Bruce Goldfarb, chief executive of proxy solicitation firm Okapi Partners. "A company will collect the information and then think about their next step."
Goldfarb and one investment banker said there's a message coming through loud and clear with Yahoo's rising stock price: Investors "expect more money."
Keeping tabs on Microsoft's efforts to win Yahoo, Matt Karnitschnig of the Wall Street Journal reported Friday on some interesting events.
As reported Thursday in News.com, the "radio silence" between the two companies has taken a shift and the parties have held informal merger discussions.
An interesting note in Karnitschnig's report is that the talks Monday in the Valley were held with only senior executives of the companies and no investment bankers from either side.
And while it's not unusual for executives to chat informally about "what if" merger scenarios without bankers and lawyers hovering about, it was a particularly smart move on Microsoft's part, said one former banker.
"Given they already have this offer out there, the dynamics are very different," the former banker told CNET News.com. "By having bankers there, it lends an air of formal negotiations. Microsoft is trying to get Yahoo to buy into the concept of a combined business and then hope they'll be more willing to negotiate...it's like trying to win the hearts and minds of the enemy. And with the bankers there, it's seen as more of a negotiating tactic than a friendly olive branch."
And while the Journal report notes that no other meetings between the companies have been scheduled since Microsoft gave its outline of the combined companies, that's not to say the folks in Redmond don't foresee another trigger point ahead.
One source familiar with the talks told CNET News.com on Wednesday that Microsoft will keep a keen eye on Yahoo's upcoming first-quarter results, when the Internet search pioneer reports its financial performance on April 22.
Microsoft and Yahoo are holding informal merger discussions, marking a shift from the "radio silence" that previously existed between the two companies, according to a source familiar with the talks.
A lot has changed over the past two weeks, compared with February 1 when Microsoft issued its unsolicited buyout bid for Yahoo, which initially valued the company at $31 a share.
"Yahoo has shown some willingness to have a conversation and talk," said the source on Wednesday. The source noted the Redmond giant has since come to the conclusion it may never get a formal rejection letter from Yahoo.
Whether these informal talks will lead to a deal has yet to be seen, added the source.
The recent events add further clarity to comments Microsoft CEO Steve Ballmer made at CeBIT a couple weeks ago, in which he said "'there is a range of dialogue' for both companies about the proposed takeover," as cited in an Associated Press report.
Another source close to Microsoft's Yahoo buyout efforts, however, cautioned Thursday that if the talks had reached a substantive level, Microsoft would have disclosed it publicly.
Last week, Yahoo announced it would extend the deadline for investors, including Microsoft, to nominate an opposition slate of directors, in an effort to avoid a proxy fight with the Redmond giant while it explored its options.
Then on Monday, one of Yahoo's possible white knights, News Corp., indicated it had no interest in entering into a bidding war with Microsoft. And on Tuesday, Time Warner's CEO noted he wouldn't rule out a deal with the company's AOL operations and Yahoo, noting in sweeping terms that Time Warner would consider anything that would make AOL stronger. AOL, however, announced Thursday it plunked down $850 million--in cash--for social-networking site Bebo. And while the Bebo acquisition doesn't necessarily mean Yahoo is no longer of interest to AOL, Time Warner has less money to burn post-Bebo.
Representatives from both Microsoft and Yahoo declined to comment.
And while the software giant could pounce and go hostile at any moment--via a proxy fight, exchange offer, or both--Microsoft-Yahoo observers should be ready to park it on a bench for a while.
Microsoft has set no internal deadline of when it's ready to say enough is enough, said the source.
"Sure there has been some frustration in Redmond over the pace, but this is a marathon and not a sprint," said the source.
CNET News.com's Ina Fried contributed to this blog.
Watching the Microsoft-Yahoo show? Here are two figures to watch in the coming weeks:
$1.32 billion and 11 cents.
Yahoo is projected to generate $1.32 billion in revenue and earn 11 cents a share for the first quarter, according to analysts' estimates collected by Thomson Financial.
Anything less than that when the company reports its first-quarter results on April 22 could apply greater pressure on Yahoo to accept Microsoft's unsolicited buyout bid that was initially valued at $31 a share. This especially holds true if no other white knights emerge to make a deal with Yahoo.
One interesting theory posted on Henry Blodget's Silicon Alley Insider suggests that Microsoft may want to cool its heels until Yahoo reports its first-quarter results. If Yahoo's quarter falls below Wall Street's projections, Microsoft could withdraw its bid, let Yahoo's share price fall back to the teens, wait a bit, then return with a lower bid of $25 a share.
But then again, why wait?
Yahoo could totally blow the quarter, but its share price may not tank because investors still know Microsoft has its bid on the table.
Microsoft could withdraw its bid at any point, before or after Yahoo's quarterly announcement, and potentially watch Yahoo's stock fall back to its pre-buyout bid levels.
If Microsoft withdraws its bid before Yahoo's quarterly results, it will have a sense of the cause-and-effect of its buyout bid and then another reference point of any investor dissatisfaction if Yahoo misses Wall Street's projections and the stock falls further.
That's called a one-two punch.
With the Google-DoubleClick merger wrapped up Tuesday, Yahoo may face even greater pressure to find itself a buyout partner, according to Wall Street analysts and investors.
The Google-DoubleClick deal presents a greater threat to Yahoo's business of providing both Internet search advertising and display advertising, note analysts. And, as a result, Yahoo now has another issue to contend with, beyond Microsoft's unsolicited megabillion dollar buyout deal waiting in the wings.
"The Google-DoubleClick deal provides further firepower to Microsoft to win over Yahoo," said Mark May, an analyst with Needham & Co. "Microsoft's bid price is the key driver to a Microsoft-Yahoo merger, but increasing competition from Google is the second factor. And within the broader category of competition from Google, the DoubleClick deal is one more factor."
DoubleClick will provide Google a strong entry into display advertising and transform it into more of a full-service advertising company with both display and search--a combination that previously differentiated Yahoo from its competitors, May said. As a result, it may weaken Yahoo's case for remaining independent.
Yahoo investor Eric Jackson, shareholder activist and president of hedge fund Ironfire Capital, notes the merger only strengthens the case that the industry needs a stronger No. 2 to compete against Google-DoubleClick.
"It doesn't help Yahoo's management in any way who are still trying to seek out a white knight," Jackson said. "This doesn't present any other possible suitor for them other than Microsoft and raises the question of how Yahoo is going to better compete against a combined Google-DoubleClick on their own? Wouldn't they be better teamed up with Microsoft?"
A number of Wall Street and industry observers, as well as antitrust experts, had largely been anticipating Google to land the DoubleClick deal and receive regulatory and shareholder approval.
"It's hard to see how Microsoft, or Yahoo, had been proceeding as if this deal (Google-DoubleClick) were not going to happen," said Derek Brown, an analyst with Cantor Fitzgerald. "It's fairly logical to think that one of the reasons the deal was initiated in first place was because of Google's expected acquisition of DoubleClick. It's hard to see how there's a radical change in viewpoint now."
One analyst notes that Yahoo, ironically, got itself into its current predicament of greater pressure from Google by expressing an interest in acquiring DoubleClick years ago. That, in turn, put Microsoft and Google into a heated bidding war. But last April, Google announced it had won the battle with a $3.1 billion bid for DoubleClick.
And while the Google-DoubleClick deal may put Yahoo's business at greater risk, it could help grease the skids on the regulatory front should it ultimately do a deal with Microsoft, said antitrust experts.
"I would expect the Commission to assess the Microsoft-Yahoo deal using exactly the same legality benchmark that it used in the Google-DoubleClick merger," said Luc Gyselen, an antitrust attorney at Arnold & Porter's Brussels office. "In that case, the Microsoft-Yahoo deal strikes me as pro-competitive. It is indeed important for customers to have a few real alternatives to choose from. It does not matter all that much how many alternatives there are on paper. What matters is how effective the alternatives are in the real world."
Microsoft's big bid for Yahoo
Gyselen, who previously served in several senior positions with the Directorate-General for the Competition Bureau of the European Commission, noted that Microsoft's past troubles with the Commission should not affect any outcome in how its merger efforts are treated in Europe.
"Talking from my own experience, each merger or antitrust case is handled on its own merits. Therefore, I cannot imagine that Microsoft's past and current dealings with the antitrust part of the Commission's competition department would create spillover effects into the mergers field."
Elinor Mills contributed to this blog.
Yahoo's first quarter is coming to a close at the end of the month, potentially increasing pressure on the company to decide whether it will negotiate with Microsoft over its unsolicited buyout bid.
The close of the quarter, after all, will be accompanied by a conference call the company will hold with analysts to discuss its financial results.
"I think the first-quarter earnings will be a hard deadline," said one investment banker. "They'll need to address things like their restructuring initiatives, earnings, and how it would look if they merged with company X, verses remaining as a standalone company."
The quarterly conference call is usually a big deal for investors, who typically like to hear the CEO address the outlook for the company. Yahoo has set its first-quarter earnings release for April 22, according to a spokeswoman. Last year, Yahoo held its first-quarter conference call on April 17.
Thirty-five days have passed since Microsoft trotted out its buyout bid. And to date, Yahoo has not formally responded to the offer.
The investment banker, who requested anonymity, said most plain-vanilla mergers tend to take four to six months from kick-off to close.
But if Microsoft goes hostile and launches its own slate of directors to oppose Yahoo's board at the next annual shareholders' meeting, the deal could potentially be delayed until October, said one Delaware attorney.
Microsoft could go to the Delaware Chancery Court on July 13, one year and a day after Yahoo held its last shareholders' meeting, and ask the judge to force a shareholders' meeting, said Stephen Jenkins, a director with Delaware law firm Ashby & Geddes, which has handled a number of proxy fights.
Microsoft's next steps have yet to be revealed, now that Yahoo announced Wednesday it was delaying the deadline for Microsoft to name its opposition slate. Yahoo extended its deadline in the hope it would buy the company more time to consider Microsoft's offer and talk with other suitors, without simultaneously having to deal with a proxy fight with Microsoft.
Although there are reports that Yahoo is holding talks with AOL and News Corp., neither has announced a competing bid. And Yahoo, as a result, hasn't taken the time to take a hard look at antitrust issues that might crop up in a merger with either of those companies, but has for Microsoft, said one source familiar with the matter.
Microsoft would likely face antitrust hurdles with a Yahoo merger and need to divest of some assets of the combined company, the source said, ranking the chances of a deal going through as 7 on a scale of 1 to 10.
But will any potential antitrust risk translate into a higher purchase price for Yahoo? So far, not yet.
Cash is king in deal making, and Microsoft's unsolicited bid for Yahoo may be throwing more greenbacks into the mix, according to a report in the New York Post.
The report, citing anonymous sources, says Microsoft is considering changing the way the deal is valued to 100 percent cash.
Under its current offer, Microsoft is valuing the deal using a formula that is based on 50 percent cash and 50 percent Microsoft stock. As a result, the value of Microsoft's offer rises and falls based on the performance of its own stock price.
Silicon Alley Insider has a close-to-real-time running tab of the deal's value, which puts the Microsoft buyout bid at $28.77 per share.
Should Microsoft change its formula to 100 percent cash, it'll be interesting to see if it locks in the price based on its current 50-50 formula or sets it at a flat rate of $31 a share, the value of Microsoft's initial buyout bid for Yahoo.
Such a move may warm the hearts of investors, who, in turn, could put the screws to Yahoo's board. The Post report says one effect Microsoft would be looking to achieve via an all-cash weighted deal is support from longtime Yahoo investor Softbank, which is represented on Yahoo's board.
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