Yahoo set to rebuff Microsoft bid

NEW YORK Sat Feb 9, 2008 4:30pm EST

A Yahoo! signs sits out front of their headquarters in Sunnyvale, California, February 1, 2008. Yahoo's board believes Microsoft's unsolicited bid of $44.6 billion (23 billion pounds) to acquire Yahoo ''massively undervalues'' the company and directors are set to reject the offer, the Wall Street Journal reported on Saturday, citing an unnamed source. REUTERS/Kimberly White

A Yahoo! signs sits out front of their headquarters in Sunnyvale, California, February 1, 2008. Yahoo's board believes Microsoft's unsolicited bid of $44.6 billion (23 billion pounds) to acquire Yahoo ''massively undervalues'' the company and directors are set to reject the offer, the Wall Street Journal reported on Saturday, citing an unnamed source.

Credit: Reuters/Kimberly White

NEW YORK (Reuters) - Yahoo (YHOO.O) is set to reject Microsoft Corp's (MSFT.O) unsolicited bid, now worth $42 billion (21.6 billion pounds), as too low, a source familiar with the situation told Reuters on Saturday -- the first clear signal the board might be prepared to negotiate and sell the Internet media giant.

The Wall Street Journal had quoted an unnamed source as saying Microsoft's offer of $31 per share was an attempt to "steal" the company and that Yahoo was unlikely to consider anything under $40 per share -- double its price in January.

At $40 per share, the value of the cash and stock deal would be worth $51.1 billion.

If completed, a merger of Microsoft and Yahoo would be the world's largest of two computer technology companies and create a formidable rival to Internet search and advertising leader Google (GOOG.O).

Yahoo has been considering options, including negotiating a higher price and striking a deal with Google to take over its search operations to keep Yahoo independent, the Journal said.

The newspaper reported Yahoo's board met on Friday.

No alternate bidder has emerged and Wall Street has been betting that the likeliest outcome was for Yahoo board's to negotiate for a higher price from Microsoft.

"Are they really seriously about nothing less than $40 or is it a negotiating tactic to try to get a richer price?" Global Crown Capital analyst Martin Pyykkonen said.

"To me it sounds like a counter-negotiation tactic. Maybe they end up settling for $35, $36 or $37 a share."

MOST LIKELY OPTION

Last Monday, Citigroup analysts spelled out various scenarios, including having Yahoo seek a higher bid, find another bidder, see the deal derailed by regulators or strike a partnership with Google.

The Wall Street firm predicted a higher bid was the most likely option but that a price of $40 per share "would seem very aggressive" because Microsoft would have a hard time justifying it against Yahoo's anticipated cash flows.

For that reason, Citigroup said paying $30 to $31 per share for Yahoo was "reasonable."

Microsoft's initial offer fails to take account of the risks that a merger between the world's largest software maker and Yahoo would be rejected by regulators, the Journal reported, citing "a person familiar with the situation."

In a series of meetings over the past week, Yahoo's board has been weighing what alternatives the company may have.

Yahoo spokeswoman Tracy Schmaler declined to comment on any specific actions of the board.

"Yahoo's board is carefully and thoroughly evaluating the Microsoft proposal in the context of all of the company's strategic alternatives," she said.

A Microsoft spokesman also declined comment.

Microsoft's half-stock, half-cash offer was originally worth $44.6 billion or $31 per share -- a 62 percent premium to Yahoo's stock price. Since then, Microsoft shares have fallen and the deal is now worth $41.8 billion.

A $40 price would represent a 109 percent premium to Yahoo's close at $19.18 per share on January 31, before Microsoft went public with its bid.

Yahoo stock last traded above $40 two years ago, before competitive pressures from Google, product missteps, management defections and repeated restructuring moves chopped the price below $20.

(Additional reporting by Eric Auchard and Anupreeta Das in San Francisco and Daisuke Wakabayashi in Seattle; Editing by John O'Callaghan)

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