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Yahoo Formally Rejects Microsoft Bid

Posted on: Monday, 11 February 2008, 12:00 CST

Yahoo Inc. rejected Microsoft Corp's unsolicited takeover offer in an effort to get the world’s largest software maker to raise its offer or find another way to deliver a comparable payoff to its shareholders.

After rumors of Yahoo’s intention to deny Microsoft’s bid, the Sunnyvale-based company said in a formal statement that its board had concluded Microsoft's unsolicited offer "substantially undervalues" its value.

Its board unanimously concluded the proposal was not in the best interests of its shareholders. Analysts said the rebuff could lead Microsoft to increase its $31-per-share offer to as much as $40 per share, according to Reuters.

Yahoo said the offer also does not take into account growth prospects or substantial holdings, which include a stake in Chinese e-commerce firm Alibaba.com.

In a risky, but potentially rewarding move, Yahoo implied that they would like to see Microsoft take these things into account and raise its bid.

"The board of directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders," Yahoo said in a statement.

During the three months leading up to Microsoft’s bid, Yahoo’s stock price had dropped by more than 40 percent. Microsoft’s bid valued at $31 per share when it was announced Feb. 1. The offer was 62 percent above Yahoo's market value at the time, according to Associated Press.

"The most likely outcome is they negotiate a higher price," said Troy Mastin, analyst at William Blair & Co. "It seems Microsoft has expressed a willingness" to go to $35 or $36 a share, he said.

But a higher bid could hurt Microsoft's own stock price, which has been slipping amid concerns that a Yahoo takeover could be more trouble than its worth. Microsoft's market value has plunged by more than $40 billion, or 14 percent, since the bid was made public, according to Associated Press.

Microsoft announced the half-stock, half-cash offer on February 1. At the time, the bid represented a 62 percent premium to Yahoo's stock price. The offer was originally worth $44.6 billion, but Microsoft shares have since fallen, and the deal is now worth $41.4 billion.

If Microsoft decides to reject Yahoo’s plan to receive a higher bid, could take its original bid directly to Yahoo's shareholders, thus ousting the 10-member board that unanimously rejected the original offer.

Also under consideration at Yahoo is an advertising partnership with rival Google, in an effort to stay independent.

The company may also make a new approach to Time Warner Inc's AOL Internet division, the Times of London reported on Monday. Time Warner declined comment on the report.

As the company continues to lose market share to Google, Yahoo's board is running the risk that the company's stock will plunge below $20 per share again if its suitor decides to walk away.

That scenario could open the door to a number of shareholder lawsuits, intensifying the pressure on Yahoo's management team to deliver on a long-awaited turnaround that has been in the works for the past 18 months.

Sanford C. Bernstein's top Internet, media and technology analysts said in a research note that there was still a chance that "the Yahoo board is digging in for a fight ... and the situation will turn ugly."

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On the Net:

www.yahoo.com

www.microsoft.com

Source: redOrbit staff

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