Yahoo Chairman Roy Bostock fired back at Carl Icahn Wednesday evening, accusing the investor of having no comprehension of the facts and no plan for the company besides selling it to Microsoft.
"Your letter seriously misrepresents and manipulates the facts regarding the recent events pertaining to Microsoft and Yahoo," Bostock said in a letter to Icahn. "Conspicuously absent from your letter is any credible plan for Yahoo other than a repetition of your insistence that the company should sell itself to Microsoft."
Bostock's letter came in response to one earlier in the day from Icahn, who accused Yahoo CEO of trying to sabotage Microsoft's acquisition attempt and suggested the company rescind a severance plan detailed in a shareholder lawsuit Yahoo failed to keep under seal.
The severance plan in effect would raise an acquisition price. The severance plan was indeed a major sticking point in the Microsoft-Yahoo negotiations, a source familiar with the situation said.
Here's the full text of Bostock's letter:
Dear Carl:
We are in receipt of your letter of June 4th and take issue with its content.
Your letter seriously misrepresents and manipulates the facts regarding the recent events pertaining to Microsoft and Yahoo!. You rely on, as "facts," a series of unsubstantiated allegations from a complaint filed in a Delaware court which grossly misstate the very clear record and position established by the Yahoo! Board. Let me elaborate:
You make reference to our employee retention plan but you significantly mischaracterize its purpose and its effect. In fact, you refer to it as a "Poison Pill" which could not be further from the truth. To set the record straight, the employee retention program is designed to protect the Company's assets and value during a time of uncertainty. The claim that the plan gives each of Yahoo!'s employees "the right to quit his or her job and pocket generous termination benefits at any time during the two years following a takeover..." is just plain wrong. In fact, our plan has a "double trigger" which means that in order for an employee to be eligible for benefits under our plan, there would need to be a change of control AND the employee would need to be terminated "Without Cause" or resign for "Good Reason." That means that in contrast to your assertions, an employee who simply quits his or her job would receive nothing under our plan.
The retention plan is intended to help us preserve and enhance shareholder value by allowing Yahoo! to continue to attract and retain the industry's best talent, and to allow employees to stay focused on implementing Yahoo!'s business strategy. In fact, the plan was adopted in order to protect the value of Yahoo! in anticipation of a possible acquisition by Microsoft which would have resulted in a lengthy regulatory review and a significant period of uncertainty for our employees. In adopting this plan, we believe Yahoo! did the right thing for its employees and its shareholders alike.
This plan was fully disclosed at the time of its adoption and should be no surprise to anyone at this point. It was disseminated to employees, publicly filed and extensively covered by the media. Significantly, as you note, Microsoft had indicated that it was prepared to spend $1.5 billion on retention incentives indicating that they too recognized that the retention of Yahoo! employees would have been critical if there had been an acquisition.
Finally, you significantly misrepresent the events of the recent past. Notably, you accuse us of turning down a $40 per share offer and "sabotaging" a $33 per share offer. Again, this is patently untrue. Yahoo!'s Board of Directors has at all times been focused on maximizing shareholder value. As has been well documented, Yahoo! has engaged in thorough discussions with Microsoft over a series of months culminating in Microsoft's decision to walk away from a potential acquisition of Yahoo!. Throughout this process, which has included an exploration of multiple strategic alternatives with multiple parties, the Board has repeatedly stated that it is open to any transaction, including a sale to Microsoft, as long as it is in the best interests of shareholders.
You seem to be under the impression that somehow Microsoft will come back to the negotiating table for a full acquisition of Yahoo!. This is puzzling as I know you are aware that we have reached out to Microsoft proactively and met with them many times in the last several weeks. During this period, their message to us and to the markets has been and remains that they are not interested in pursuing a full acquisition of Yahoo!.
Conspicuously absent from your letter is any credible plan for Yahoo! other than a repetition of your insistence that the Company should sell itself to Microsoft. Indeed, your stated view that "the only way to salvage Yahoo! in the long if not short run is to merge with Microsoft" demonstrates that you have no other plan and causes one to wonder what exactly would happen to our Company if you and your nominees were to take control of Yahoo!.
Sincerely,
Roy Bostock Chairman of the Board
Google's top brass are meeting Monday to figure out a response to how Microsoft's new overtures toward Yahoo affect Google's potential ad deal with Yahoo.
Google Chief Executive Eric Schmidt, speaking to reporters at a Google Zeitgeist event in the U.K., said he's meeting with co-founders Larry Page and Sergey Brin on the matter, according to the Times Online. "After this press conference the three of us will meet and decide what our response is," Schmidt said.
Google and Yahoo have been discussing a partnership under which Google would supply some text ads alongside Yahoo search results; both companies expressed satisfaction with a limited two-week test. However, an announcement of the partnership between the online rivals has been delayed more than once.
Google's top executives have said they'd like to offer Yahoo a helping hand in their travails to fend off Microsoft, then activist shareholder Carl Icahn, and now Microsoft again. And Brin went one step further, saying he'd give Yahoo CEO Jerry Yang refuge within Google if he's ousted from the Internet pioneer, according to press accounts.
"Jerry is very talented, and if he wants to work at Google, we'd be very excited to have him, but I don't think that's going to happen," Brin said, according to the BBC.
Microsoft attempted to acquire Yahoo but now is considering a more limited acquisition of only part of Yahoo, the company said.
Yahoo and shareholders suing the company don't see eye to eye about how public some documents involved in the case should be.
The documents involve details of a severance plan Yahoo adopted after Microsoft launched its attempt to acquire the Internet company in February. Yahoo wants to keep the documents redacted, but Joel Friedlander, the attorney representing the shareholders, accused Yahoo of trying "to whitewash embarrassing documents" so they couldn't be used to undermine its effort to fend off activist investor Carl Icahn's attempt to oust Yahoo's board, according to The Associated Press.
Also included in the documents are notes from a conversation between Jerry Yang and Steve Ballmer, the respective chief executives of Yahoo and Microsoft, and of comments top executives made about the severance plan, the AP said. The information was gathered during the discovery phase of the lawsuit.
A hearing is scheduled for Tuesday on the matter for the Delaware case.
The severance plan was one sticking point in discussions between Yahoo and Microsoft, a source familiar with the negotiations said.
Citigroup analyst Mark Mahaney has been widely cited for his February analysis showing some strong financial benefits of a deal under which Yahoo would use Google to supply search ads. With that scenario now appearing more likely, he's issued a new report on the subject that projects as much as $1 billion in incremental cash flow for Yahoo in 2008.
But that dramatic figure is based on a complete outsourcing of search ads to Google. So don't expect anything like that number to come of the potential pact, which could be announced this week. A source familiar with the plan describes it as more limited, not a wholesale outsourcing.
The overall Google ad deal is a balancing act for Yahoo. The more Yahoo relies on Google, the more financial benefit it stands to gain because Google's ads on average generate more revenue per click than Yahoo's. But more reliance also undermines Yahoo's in-house ad effort, raises the potential for antitrust concerns, and gives more ad-market clout to Yahoo's top rival--Google.
Cost savings is another factor. Without fully outsourcing, Yahoo doesn't get to trim payroll, research, and operational costs for its Panama system for selling text ads that show on search results.
So it seems judicious not to fixate on Mahaney's 100 percent outsourcing scenario, but on a lower one such as 25 percent, which he predicts will generate EBIDTA (earnings before interest, depreciation, taxes, and amortization) of $2.2 billion and cash flow of $251 million in 2008.
Henry Blodgett at Silicon Alley Insider also observes that any gains would increase the level of cash Yahoo would make, but it wouldn't be a steady, repeatable increase year after year--the kind of revenue growth Wall Street likes to see. His conclusion: outsourcing some ads to Google would be "smart," but not the "bombshell game-changer the Street is looking for."
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Yahoo CEO Jerry Yang
(Credit: Dan Farber/CNET Networks)Microsoft's attempt to acquire Yahoo is behind the company for now, but Yahoo Chief Executive Jerry Yang took pains Sunday to indicate the company has not entered a complacent phase.
"No one is celebrating about the outcome of these past three months...and no one should," Yang said in a post on the Yahoo's corporate blog. "We live and work in a competitive world, and the Web is only going to get more competitive. Executing on our strategic plan is what matters most."
And apparently taking to heart the words of Friedrich Nietzsche--that which does not kill us makes us stronger--he added, "We've emerged a stronger, more focused company with an even greater sense of purpose."
Yang didn't share specifics about what Yahoo plans to do next, now that its resolve is strengthened but in all likelihood its stock price is weakened.
"We'll continue to execute on our plan--making your Internet experience as personal, relevant, open, and social as possible, serving advertisers so well they insist on working with us, and opening up Yahoo in a way that developers dream of," Yang said. "And, we'll also continue to pursue strategic opportunities that position us for long-term success."
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Internally, the company is working rewire its Web site with a plan called Y!Open to link its multiple properties and make them into a foundation on which programmers can build new applications and services. It's an ambitious plan to give the company something of a Web 2.0 overhaul, and my colleague Dan Farber thinks this plan is the Yahoo exclamation mark Yang was talking about when he told employees Saturday, "Now is the time to demonstrate what that exclamation point stands for."
Externally, the two likeliest strategic options are deals with Google to use its search ads and with Time Warner to acquire AOL are in the works, a source familiar with Yahoo's plans said.
Also in the post, Yang also bridled at some media coverage of the acquisition saga.
"Frankly, there's a lot of nonsense and misinformation in what's being reported," he said, then jumped back to the party line when describing what happened. Stop me if you've heard this one before: "The board took its mission very seriously. We clearly indicated to Microsoft that we were open to a transaction, but only if it were on terms that fully recognized the value of Yahoo and was in the best interests of our stockholders."
Yang touted a long list of products and the company's first-quarter results (yes, the ones that left the share price unmoved) as evidence to support "our board's position that Microsoft's offer undervalued our unique global franchise."
Microsoft may no longer be breathing down its neck, but Yahoo is still working on major deals with Google and Time Warner's AOL that could significantly alter the Internet pioneer.
The nearer-term possibility is a partnership to use Google for delivering some ads next to Yahoo search results. That option apparently is still on track to be announced this week, perhaps Wednesday or Thursday, according to a source familiar with the situation.
The Google deal could increase Yahoo's revenue, because Google gets more revenue per click for its ads, but it also could reinforce Google's search-ad leadership and make it even harder for Yahoo to catch up with its own Panama system. And though Yahoo thinks it can address antitrust concerns by employing a system that's open to other ad suppliers as well, regulatory scrutiny is a significant factor.
A deal to acquire AOL also is under active consideration, although talks haven't progressed as far as with the Google arrangement, the source said. Under that deal, Yahoo would get AOL, sans its declining Internet access subscription business, and cash from Time Warner, and Time Warner would get a 20 percent stake in Yahoo.
Yahoo would use the cash to buy back its own stock, a move that could increase its value. Since most observers expect Yahoo's price to drop Monday because Microsoft walked away, Yahoo likely will face pressure to boost its share price.
Another possibility Yahoo explored was a partnership with Fox Interactive, but that didn't progress as far as the Time Warner deal, the source said.
Yahoo declined to comment on the possibilities.
This is the text of the e-mail Yahoo Chief Executive Jerry Yang sent to his company's staff Saturday after Microsoft withdrew its offer to acquire the Internet pioneer.
From: jerry yang
To: [Yahoo Employees]
Sent: Sat May 03 19:26 2008
Subject: today's news
yahoos,
today microsoft announced that it has withdrawn its proposal to acquire yahoo!. from the beginning of this process, our independent board and leadership team have maintained that microsoft's offer undervalues the company, and we're pleased that many of our shareholders agreed with us. our board and leadership team now remain focused on maximizing shareholder value and pursuing strategic opportunities that position us for success and leadership in our markets.
of course, we anticipate that microsoft's announcement will draw media attention and speculation as to what happens next for yahoo!. that means the spotlight will be on us - just as it has been for the past three months. i'm incredibly proud of how we've performed under such scrutiny, with last quarter's great financial results as a testament to everyone's hard work and focus. just as we did last quarter, now is the time for us to shine and show what we're made of.
with the distraction of microsoft's unsolicited proposal behind us, we must redouble our efforts. we should focus our energies on continuing to execute the most important transition in our history. how will we do this? by executing against the strategies and priorities we already have in place, and by continuing to deliver indispensable experiences for our communities of users, advertisers, publishers and developers.
in the end, it all comes back to who we are as a company. we have a spirit and a culture that is uniquely yahoo! - and we can't forget that. staying true to who we are has helped us pull through the recent uncertainty we've faced, and will continue to be an asset as we move ahead. there's a reason why we're the only fortune 500 company with an exclamation point at the end of our name, and now is the time to demonstrate what that exclamation point stands for.
over the next several weeks, sue and i plan to visit as many offices as we can to thank you in-person for everything you've done and continue to do for yahoo!. we hope you're as excited as we are about the future that lies ahead for all of us -- together as one yahoo!.
jerry
Apparently Yahoo wasn't just bluffing with its plan for an ad deal with rival Google.
The search company had planned to announce the partnership by midweek, a source familiar with the plan said. Under the deal, Google would supply text ads next to Yahoo search results; Yahoo conducted a limited-scope test of the Google ads for two weeks in April.
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How exactly the potential partnership could come to fruition remains unclear with Microsoft walking away from its Yahoo acquisition offer.
On the one hand, Microsoft's withdrawal reduces some urgency and gives Yahoo more flexibility to chart its own course. On the other hand, Microsoft's attempt to acquire Yahoo has raised shareholder expectations for where the search pioneer's stock price should be.
Citigroup analyst Mark Mahaney and colleagues estimated in a February report that Yahoo makes less than 4 cents per click on its search ads to more than 9 cents for Google, so sharing could help Yahoo generate more cash and help Google deliver more ads.
Pairing the No. 1 and No. 2 search-ad companies could raise antitrust issues, but Yahoo had planned to address the situation by offering an open system in which others besides just Google could offer ads, the source said. It would employ a dynamic bidding system that would place the ad that would generate the highest revenue. It's unclear whether Yahoo has extended any offers to others, such as Microsoft, to participate.
Yahoo declined to comment on the planned announcement.
Microsoft Chief Executive Steve Ballmer was not so restrained. In a letter to Yahoo Chief Executive Jerry Yang Saturday, Ballmer criticized the Google ad deal as a key reason the company didn't want to make a "hostile" bid to acquire Yahoo.
"Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft," Ballmer said. The deal would undermine Yahoo's own ad system, make it hard to retain employees, and increase Google's power in search ads even more, he said.
Here's the full text of Yahoo's response after Microsoft withdrew its offer to acquire the company.
Chairman Roy Bostock: We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo for success and leadership in its markets. From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view. Yahoo is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market. Our solid results for the first quarter of 2008 and increased full year 2008 operating cash flow outlook reflect the progress the company is making. Today, Yahoo has:
• a refined strategic focus to drive enhanced volume and yield;
• reorganized to focus its efforts on its most promising products and services;
• invested in innovations designed to revolutionize display advertising and facilitate closing the competitive gap in search; and
• enhanced expense and resource management to support improved profitability.
CEO and co-founder Jerry Yang: I am incredibly proud of the way our team has come together over the last three months. This process has underscored our unique and valuable strategic position. With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users.
Update 8:10 p.m. PDT: I added some detail about Yahoo's financial performance and its claims of progress. Update 7:35 p.m. PDT: I added more detail about Microsoft's maximum bid and Yahoo's minimum requirement.
Microsoft just wasn't willing to pay enough for Yahoo to make the deal worthwhile, the company said Saturday.
"From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view," Yahoo Chairman Roy Bostock said in a statement.
Microsoft withdrew its offer to acquire Yahoo after increasing its $31-per-share cash-and-stock bid to $33. Yahoo evidently thought that too low--Microsoft Chief Executive Steve Ballmer said Yahoo wouldn't go below $37.
Bostock also indicated that Yahoo thinks it can grow just fine on its own, even if he didn't declare Yahoo restored to financial vigor. However, he didn't share specifics about what's next for the company.
"Yahoo is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market. Our solid results for the first quarter of 2008 and increased full year 2008 operating cash flow outlook reflect the progress the company is making," he said.
Yahoo's first quarter, though, certainly didn't knock the ball out of the park, in stark contrast to Google's results the week earlier. Yahoo reported net income of $542 million, but excluding a $401 million non-cash gain related to its stake in Alibaba Group, that was flat from a year earlier. The fundamentals of the Microsoft situation remained unchanged, and the stock didn't budge.
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It's quite possible Microsoft will return again for another bid--particularly if Yahoo's share price plunges and the purportedly loyal shareholders agitate for fast change. But Yahoo Chief Executive Jerry Yang was willing to call the Microhoo saga at an end.
"With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners, and users," Yang said in a statement.
Yahoo claimed some successes, saying the company is working to improve ad volume and yield from those ads; reorganized to focus on its most promising areas; invested in the display-ad business and in catching up to Google in search-based text ads; and improved expense controls to improve profitability.
So what's next? Yahoo has a number of options, all inevitably to be seen through the lens of the company's stock price on Monday. Microsoft's offer more than three months ago sent Yahoo's stock up dramatically from $19.18 beforehand to $28.67 on Friday.
Yahoo, though, was unspecific about its plans.
Bostock said Yahoo remains focused on pursuing unstated "strategic opportunities." That covers a wide range of possibilities. No doubt shareholders will be interested to compare details with what Microsoft had to offer.
