Yahoo's second-largest shareholder is offering this assessment of Microsoft's proposed acquisition: Microsoft will need to "enhance its offer" to complete the deal; Yahoo will be in a "tough spot" if it wants to remain independent.
That judgment was included in the latest Legg Mason Value Trust newsletter by Bill Miller, the chief investment officer of Legg Mason Capital Management, which holds more than 80 million Yahoo shares.
Although the newsletter was released one day before Yahoo issued its rejection to Microsoft's buyout bid and Microsoft responded to Yahoo's rejection letter, some of the comments appear to still be current.
"We think it will be hard for Yahoo to come up with alternatives that deliver more value than Microsoft will ultimately be willing to pay," Miller said in the newsletter.
And Miller characterized Microsoft as needing to do the deal. Said Miller: "We think this deal is a strategic imperative for Microsoft."
Since Microsoft floated out its unsolicited buyout bid of $44.6 billion on February 1, Legg Mason has had conversations with both Steve Ballmer, Microsoft's chief executive, and Jerry Yang, Yahoo's founder and chief executive.
"It has been reported that Microsoft has been discussing a combination with Yahoo for well over a year and that it had been prepared to pay over $40 per share previously," Miller stated in the newsletter, noting that his firm is not able to determine the accuracy of the reports. "Our own valuation work puts the value of Yahoo in the range of those reported numbers, though, and we think Microsoft will need to enhance its offer if it wants to complete a deal."
Time will tell.
Microsoft says it can find $1 billion in cost cuts by combining Yahoo's business with its own Internet services operation, however CEO Steve Ballmer says the Yahoo name isn't one of the things on the chopping block.
"Yahoo, the brand, will live," Ballmer told BusinessWeek.
Even if the brand lives, though, it is unclear which of Yahoo's technologies Microsoft would adopt. A merged company would have to choose among two e-mail systems, to ad platforms and two instant messaging systems, to name just a few of the many overlaps.
Microsoft has thus far offered few details on what it might look to cut if its deal goes through, and Ballmer didn't offer much in the way of new details in the magazine interview.
Of course, the biggest hurdle at the moment is convincing Yahoo to take its offer, one which has declined in value since it was made last week.
A decline in Microsoft's stock in the days since its Yahoo bid was announced could make doing the deal more expensive, Wall Street analyst-turned blogger Henry Blodget noted Wednesday.
When Microsoft announced the bid on Friday, it offered $31 a share in cash or stock. Specifically, it offered Yahoo shareholders 0.9509 Microsoft shares for each Yahoo share they own.
Right now, both the exchange ratio and the cash price are fixed, meaning Microsoft is offering $31 in cash or roughly $27 in stock. Obviously, all the shareholders would want cash, but Microsoft has already specified that the deal is half cash and half stock.
All this is elementary at this point, since Yahoo hasn't yet come to the bargaining table. What is noteworthy, though, is that as of right now, Microsoft's offer has dropped. To offer $31 a share in stock, Microsoft would have to boost the exchange ratio, a move that would mean more dilution for existing Microsoft shareholders.
Plus, many believe that Microsoft may have to hike its bid higher than $31 a share to seal the deal, a prospect that gets even pricier if Microsoft shares don't rebound.
Microsoft declined to comment on the impact of its share drop on the cost of the deal.
It's not uncommon for investors to send shares of an acquiring company lower on word of a deal, but that doesn't make the financial realities any less real.
Yahoo co-founder and Chief Executive Jerry Yang issued another rally call to troops on Wednesday, according to a filing with the Securities and Exchange Commission.
The company-wide e-mail was Yang's second in three days. It includes not only encouragement to employees, but touts recent activities by the company that have been overshadowed by Microsoft's unsolicited $44.6 billion buyout bid.
Here's the text of Yang's Wednesday e-mail on Microsoft's merger proposal, which undoubtedly won't be his last.
Subject: Building on our strengths
yahoos --
first off, I want to thank you for the great job you're doing staying focused on executing our priorities. there's obviously been a lot of talk about yahoo! in recent days and we won't let it distract us from pursuing our transformation strategy.
roy and I have communicated about the thorough review process our board is going through right now. the board is focused on maximizing the value of yahoo!'s tremendous assets for our shareholders. and it is going to take the time it needs to do it right.
as we've said, no decisions have been made about microsoft's proposal. our board is thoughtfully evaluating a wide range of potential strategic alternatives in what is a complex and evolving landscape. and we've hired top advisors to assist through the process.
what's become clear in the past few days is how much people care about this company. we've seen a strong show of support from our users, advertisers, and publishers, reminding us how much they love our products and services. and i've heard from many of you -- and from other friends and colleagues from around silicon valley and across the globe -- that we need to do what's best for yahoo! and our shareholders. i promise you that the board is going to do that.
the microsoft interest highlights the tremendous strength of the yahoo! brand and assets: our half billion users around the world, our leading products and services, our open ad network, our technology, and most of all, our amazingly talented people.
we have a lot to be excited about and there's more good news to come. yesterday we announced a digital music partnership with rhapsody and our acquisition of foxytunes, maker of the popular music toolbar plugin. today we launched zimbra 5.0, a next generation e-mail and collaboration suite that's a great milestone in our open platform and starting point strategies. and stay tuned for exciting announcements next week at the mobile world congress.
as we look to build on the progress we've been making, i want to make sure you all realize how essential you are to yahoo!'s success. as this process moves forward, we're going to keep you informed. your hard work and strong commitment are more important now than ever before.
jerry
Jerry Yang has already gotten calls from Steve Ballmer and Eric Schmidt, but he's having trouble filling up the rest of his five faves.
Try as Yahoo might, apparently no one wants to bid against Microsoft's bulging bank account.
The Wall Street Journal reported Tuesday night that no serious bidders have emerged to rival Microsoft's $44.6 billion bid for Yahoo. The one party most interested in scuttling Microsoft's efforts--Google--faces uphill regulatory battles in almost any kind of partnership, alliance or investment it might want to do.
The clock is ticking. Does anyone other than Ballmer want to add Yang to their friends and family?
Microsoft is planning a new release this spring of its Live search product, code-named Rome.
That tidbit was mentioned Friday as part of the software giant's employee Webcast to discuss the Yahoo bid. Microsoft filed a transcript of the employee meeting on Monday with the Securities and Exchange Commission. This is just the first of many product tidbits one can expect as part of the regulatory filings being made in conjunction with the offer.
Unfortunately, Microsoft didn't share much on what can be expected with Rome. Microsoft updated its search product last September, although the company has continued to remain a distant third to Google and Yahoo in the search market.
Microsoft said it is also planning its next update for Windows Live. The company began the second generation of the Internet services suite last July.
"We are now in vision phase for Windows Live wave 3, working to get that out later this year," division President Kevin Johnson told employees during the Webcast.
We'll be doing our best here at CNET News.com to ferret out more product details, but we wouldn't say no to some help. Whether you are at Google, Yahoo, Microsoft, or somewhere else in searchland, feel free to send along your tidbits to ina dot fried at CNET dot com. There's a lot to go through, and we're bound to miss something. Plus, not all of Ray Ozzie's thoughts get filed with the SEC.
Also, I forgot to mention this, but CFO Chris Liddell noted at this morning's financial analyst meeting that Microsoft would likely have to raise money--a first for the company--to finance its Yahoo purchase.
Steve Ballmer spent plenty of time talking about Yahoo during Microsoft's just-concluded meeting with financial analysts on Monday. However, the CEO offered little news with regards to the company's $44.6 billion bid for Yahoo.
He reiterated many of the things he said in announcing the deal Friday, talking about the need for scale in the business and the benefits of combining the two companies' research-and-development efforts.
Ballmer also echoed General Counsel Brad Smith's comments Sunday--that Microsoft buying Yahoo would increase competition by creating a stronger alternative to Google, while other potential options for Yahoo would ultimately reduce competition.
Asked whether Microsoft had purchased any Yahoo shares on the open market, Chief Financial Officer Chris Liddell declined to comment.
Asked what would happen if Microsoft's bid does not go through, Ballmer said Microsoft would continue full steam ahead with its existing plan to build its online-ad business.
"We have a chance to get further sooner through the acquisition of Yahoo," Ballmer said, adding that Microsoft is "on a path, and we'll stay on that path, regardless."
Wonder what Yahoo chief executive Jerry Yang and the company's nonexecutive chairman, Roy Bostock, said to the troops on Friday, after Microsoft launched its unsolicited $44.6 billion bid?
Here's the text of the e-mail they sent to employees, which the company filed Monday with the Securities and Exchange Commission:
Subject: more on today's news...
-CONFIDENTIAL-
fellow yahoos:
since we talked to you this morning, there's been a lot of media coverage and industry chatter about microsoft's unsolicited proposal to acquire yahoo!. we know you've been hearing and reading a lot about this. that's why we wanted to reach out to all of you at the end of the day to emphasize a few things that we hope will give you some more context about this proposal, the process that our board is taking, and what you can expect in the days ahead.
first, we want to emphasize that absolutely no decisions have been made--and, despite what some people have tried to suggest, there's certainly no integration process underway. this proposal is just that--a proposal. and it was only made in the last 24 hours. you can be sure the board is going to review it thoughtfully and carefully, and do what's right for our great company. microsoft's proposal is one of many options that we're evaluating in order to maximize value for our shareholders and employees over the long-term. that's why we will respond to microsoft after our board has completed a careful review of all of our strategic alternatives.
second, we can't let any of the noise we're hearing around this situation distract us from our core mission. it's critical that we continue to focus on running our business, executing our strategy and delivering value to all of our users, advertisers and publishers.
finally, we realize that this may have been a tough day for many of you, especially those on the front lines of our business. we know you have many questions, and we're committed to making sure you're as informed as possible as this process moves forward. in the interim, we both want to thank you for your continued energy, focus and determination. we'll continue to share information with you as we have it and can do so.
jerry and roy bostock (our new non-executive chairman)
It's been a tumultuous few days for Yahoo--you know, with that takeover bid from Microsoft--but the company continues to shake things up internally, too.
On Monday, the company announced that it will discontinue its Yahoo Music Unlimited subscription service and will transfer its customers to RealNetworks' Rhapsody service.
In mid-2008, Yahoo Music Unlimited subscribers will be guided through an in-browser process to convert their music libraries to Rhapsody's service. For a limited time (length unknown), they'll be able to keep paying Yahoo's subscription fees, which cap out at $8.99 per month, before being required to start paying Rhapsody's $12.99 monthly fee.
Additionally, Yahoo announced in conjunction that it has acquired FoxyTunes, a browser plug-in that is compatible with multiple desktop and Web-based music players.
RealNetworks, which acquired Rhapsody when it purchased parent Listen.com for $36 million in 2003, has been partnering with both hardware manufacturers like TiVo and media companies like Viacom's MTV Networks. It's the company's best strategy for staying afloat in a digital music landscape that's not only dominated by Apple's iTunes but also seems to be gravitating toward "free," not subscription-based models.
But the announcement with Yahoo is shrouded in uncertainty, for obvious reasons. Just about anything could happen to Yahoo if Microsoft's proposed $44.6 billion acquisition goes through.
RealNetworks, ironically, has a hostile history with Microsoft, too, dating back to an antitrust scuffle several years ago that led to a partnership in which RealNetworks ultimately claimed it was shortchanged.
Nu-uhhh.
That's a one word summary of Microsoft's statement Sunday rebutting Google's statement earlier in the day that said Microsoft's $44.6 billion bid for Yahoo could raise antitrust concerns.
"The combination of Microsoft and Yahoo will create a more competitive marketplace by establishing a compelling number two competitor for Internet search and online advertising," Microsoft lawyer Brad Smith said in a statement. "The alternative scenarios only lead to less competition on the Internet."
Smith argues that Google already has three-quarters of the paid search market and about two-thirds of U.S. search queries and 85 percent in Europe.
Meanwhile, Reuters is reporting that Yahoo is considering some type of tie-up with Google, potentially something smaller than an all-out acquisition. Google Chief Executive Eric Schmidt phoned Yahoo Chief Executive Jerry Yang on Friday to discuss how to avoid a Microsoft takeover, either by offering money or guaranteed revenue in exchange for Yahoo outsourcing its advertising to Google, according to a report in The Wall Street Journal. A Google spokesman said the company had no comment on the report, and Yahoo representatives could not be reached for comment.
