Yahoo! rejected Microsoft Corp’s unsolicited $41.6 bln takeover offer as too low on Monday, forcing the software maker to either sweeten the bid or adopt a hostile approach to clinch a deal.
Microsoft responded by calling its offer fair, but stopped short of saying it would not raise its offer. Without specifying its next move, Microsoft said in a statement it reserves the right “to pursue all necessary steps.”
Analysts say Microsoft will probably raise its bid, originally valued at $31 a share, to at least $35, but could be persuaded to go as high as $40. Yahoo’s statement did not suggest what price its board was seeking.
“The proposal is not in the best interests of Yahoo! and our stockholders,” Chief Executive Jerry Yang wrote in an e-mail to employees on Monday. “We believe Microsoft’s proposal substantially undervalues Yahoo!”
Microsoft plans to complete the largest-ever computer technology merger in a bold strategic move aimed at creating a formidable rival to web search leader Google.
Yahoo said Microsoft’s offer did not properly assess its global brand, its audience of some 500 mln users worldwide and investments in its online advertising platform.
The offer also does not take into account growth prospects or overseas holdings, which include a stake in Chinese e-commerce firm Alibaba.com, the company said. Yahoo said its board was evaluating all its strategic options.
Microsoft now must decide whether to sweeten its offer, launch a proxy fight or, the least likely option, withdraw.
“The most likely outcome is they negotiate a higher price,” said William Blair & Co analyst Troy Mastin. “It seems Microsoft has expressed a willingness” to go to $35 a share or $36 a share, he said.
Yahoo shares rose 67 cents, or 2.3%, to close at $29.87. The stock is now trading at a 3.3% premium to Microsoft’s cash-and-stock deal value, indicating investors are expecting Microsoft to raise its bid.
A more hostile alternative could be to propose a tender offer to buy shares directly from Yahoo shareholders, although Yahoo could use a “poison pill” defense to dilute the stock holdings purchased in the market by an unwanted aggressor.
Microsoft could seek to replace Yahoo’s board with directors more favorable to its point of view. Yahoo has set a March 14 deadline for shareholders to nominate directors.
“Acquisitions, especially in technology, are prone to high risk and high failure rates. Hostile transactions make it even more difficult for acquisitions to be a success,” said Andy Miedler, technology analyst at Edward Jones. “Microsoft clearly knows this.”
RBC Capital cut its rating on Microsoft to “sector perform” from “outperform” and cut its target price to $31 from $40, saying the company would be distracted with the acquisition and extended integration with Yahoo if successful.
Microsoft shares fell 1.23% to $28.21 in Nasdaq trade. The stock has lost 13% since the company went public with its bid for Yahoo, losing about $41 bln in market value — close, ironically, to the amount of the bid.
Microsoft announced the half-stock, half-cash offer on February 1. At the time, the bid represented a 62% premium to Yahoo’s stock price. The offer was originally worth $44.6 bln, but is now worth $41.6 bln.
Yang, who founded Yahoo with David Filo as a graduate student at Stanford University, has taken steps to try to keep the company independent, including considering an alternate tie-up in which Google would handle its search operations.
The company might also make a new approach to Time Warner Inc’s AOL Internet division, the Times of London said on Monday. Time Warner declined comment.
Yahoo shareholders may not have much patience for a drawn-out battle, particularly as the company continues to lose market share to Google. Yahoo last month disappointed Wall Street with its 2008 revenue forecasts, promising to cut jobs and shore up its web advertising with new investment.
A dissident group of Yahoo shareholders said on Sunday it had launched a campaign to sell their shares as a block. Eric Jackson, leader of a group of shareholders representing less than 1% of Yahoo shares, said his group was prepared to negotiate separately with Microsoft or any other bidder.
Big institutional shareholders, many of whom holds shares in both companies, have not publicly endorsed Microsoft’s bid. T. Rowe Price, the Baltimore-based money manager which owns 18 mln Yahoo shares and 129.4 mln Microsoft shares as of the end of September, said it is still evaluating the bid.
In the e-mail to employees, Yang said Yahoo was well positioned to capture a larger share of a global online advertising market that is expected to grow to $75 bln in 2010 from $45 bln in 2007. (Reuters)
