July 16, 2008
Yahoo-Microsoft Battle Heats Up As Meeting Nears
Yahoo and Microsoft traded new accusations this week over the latest breakdown in deal talks as the battle for control of Yahoo heated up before a confrontation at Yahoo's annual shareholder meeting on Aug. 1.
The activist investor Carl Icahn, leading a proxy campaign to remove Yahoo's management and board at the shareholder meeting, criticized Yahoo on Monday for rejecting a joint proposal he made with Microsoft that he said contained enhanced protections to Yahoo and its investors.
During the negotiations, according to Icahn, Microsoft's chief executive, Steve Ballmer, said that Yahoo's concerns over who would control the company were a distraction from the deal at hand.
"First, tell us if you like the deal," Icahn quoted Ballmer as having said.
The Yahoo chairman, Roy Bostock, said of the latest offer, "Microsoft and Mr. Icahn are trying to dismantle the company and deliver our search business to Microsoft on terms that would be disadvantageous to Yahoo stockholders."
Yahoo turned down that offer on Saturday, complaining that it had only 24 hours to consider a deal it called financially inferior and more risky than its current business prospects and a search advertising partnership with its rival, Google.
Yahoo also said it was open to a full-scale merger with Microsoft if it offered at least $33 a share.
Yahoo shares fell $1, or 4.2 percent, to close at $22.57 on Monday, while Microsoft shares fell 10 cents, or 0.4 percent, to close at $25.15.
Sandeep Aggarwal, an Internet sector analyst with the investment banking group Collins Stewart, said investors were discounting the prospect of a full-scale Microsoft merger.
"What is becoming increasingly clear is that Microsoft's heart is set on Yahoo search," Aggarwal said.
Microsoft said it made the new offer in response to a request for a new proposal from Bostock.
Microsoft denied that it had set a 24-hour ultimatum, saying that it was seeking only a commitment by Yahoo to accept the framework and agree to a timeline to move to intensive talks.
Icahn said Microsoft's new offer provided assurances to Yahoo of $2.3 billion in annual search revenue for up to 10 years, assuming Yahoo's audience remains intact and the parties agree to renew. Yahoo said the offer, with all of its conditions, would leave it at the mercy of Microsoft.
Icahn said Microsoft's offer valued Yahoo at $33 per share, which included a proposal for Microsoft to tender $3.9 billion for 14 percent of Yahoo.
The offer assumed that Yahoo could realize $9 a share on its Asian assets and that Microsoft would provide debt financing worth $2 a share, leaving $16.73 a share for the remainder of Yahoo, Icahn said in a financial regulatory filing.
The latest proposal follows six months of on-again, off-again talks that started when Microsoft made an unsolicited $31-per-share offer of cash and stock to buy Yahoo in January. Microsoft then raised its offer to $33 per share, or $47.5 billion, before pulling that bid in May when Yahoo's leaders said they would not settle for less than $37 a share.
Icahn mocked Yahoo's current willingness to accept a Microsoft buyout of around $33 a share, after rejecting the same a few months back, saying, "It is hard to understand why it turned down $33 and is now willing to accept it."
Aggarwal said, "Within the past month, Yahoo's bargaining power has come down dramatically. Clearly, from Yahoo's perspective, they were working on a certain set of wrong assumptions about Microsoft's willingness to buy it."
Jeffrey Lindsay, an analyst at Sanford C. Bernstein, disagreed, saying the latest push by Microsoft and Icahn to reach a deal with Yahoo appeared to have been a long-shot attempt to reach a last- minute deal or, more likely, a way of gaining ammunition in the Aug. 1 shareholder meeting.
Lindsay said Icahn and Microsoft might have overplayed their hand by giving Yahoo the chance to look reasonable by saying it was willing to sell the company for as little as $33 per share.
While acting in concert with Microsoft, Icahn has failed to answer questions about whether he will have any serious negotiating power with Microsoft if he succeeds in removing Yahoo's board and Jerry Yang as chief executive, the analyst said.
"For investors to get behind Icahn, they have to be convinced that he has a credible alternative," Lindsay said.
Icahn, who controls about 5 percent of Yahoo shares, has nominated a slate of nine directors to replace Yahoo's board and oust Yang on Aug. 1.
Icahn also said he was open to discussing keeping a number of the current board members.
Yang co-founded Yahoo in 1994 and held the irreverent executive- without-portfolio title until becoming chief executive in 2007.
Originally published by Reuters.
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