Legg's Miller says Microsoft should boost Yahoo bid

A woman jogs in front of Yahoo! headquarters in Sunnyvale, California, February 1, 2008.

BOSTON (Reuters) - A star money manager at Yahoo Inc's (YHOO.O) second-biggest shareholder said Microsoft Corp (MSFT.O) must raise its unsolicited $41.6 billion takeover offer for the Internet firm.

Bill Miller of U.S. asset manager Legg Mason Inc (LM.N) estimated Yahoo's fair value at $40 a share -- a premium on the $31 a share offered by Microsoft on January 31. That would be almost 30 percent higher than Microsoft's offer. Yahoo shares closed at $19.18 before the offer was made.

Yahoo rejected the bid by the world's biggest software maker as too low on Monday.

"We think MSFT (Microsoft) will need to enhance its offer if it wants to complete a deal," Miller said in a quarterly letter to investors of the firm's flagship Value Trust fund. The letter, dated Feb 10, was released on Tuesday.

Miller was unavailable for comment.

Miller, in his letter, said he and his team met with Microsoft Chief Executive Steve Ballmer and spoke with Yahoo CEO Jerry Yang after Microsoft's bid on January 31.

But the fund manager suggested Yahoo may ultimately need to embrace Microsoft, saying it would struggle as an independent company.

"We think it will be hard for YHOO (Yahoo) to come up with alternatives that deliver more value than MSFT will ultimately be willing to pay," said Miller.

Miller, 58, has steered the $16.5 billion Value Trust (LMVTX.O) to 15 straight years of outperformance against the Standard & Poor's 500 index .SPX until 2006. It has underperformed against the index for the past two years.

As of end-September, Legg Mason Capital Management, the unit of Legg Mason headed by Miller, owned 6.57 percent of Yahoo, according to Reuters data.

PUZZLED ON COUNTRYWIDE

Miller also said he was surprised by mortgage finance firm Countrywide Financial's CFC.N move to sell itself to Bank of America (BAC.N) at a low price and that Legg Mason had not decided whether it will vote against the acquisition.

Bank of America agreed in January to buy Countrywide in an all-stock transaction valued at about $4.4 billion.

Legg is the biggest shareholder of Countrywide and recently raised its stake to 14.9 percent and has regulatory approval to hike its stake to 25 percent, he said.

"We were quite surprised by the decision to sell the company at close to a seven-year low in the stock price," the fund manager said. The bid was also 30 percent of Countrywide's book value and less than three times consensus earnings estimated for 2009, he said.

"What makes the decision puzzling is that the company was seeing solid deposit growth, has no apparent capital problems, was not forced by the regulators to seek a merger partner, and is in sufficiently sound condition to have declared its regular quarterly dividend at the end of January," Miller said.

Miller said in November Countrywide's long-term business value was above $40.

"He hasn't been an activist shareholder very often. I think this is a case where he clearly believes that the acquisition at its current price would not be beneficial," said Greg Carlson, a mutual fund analyst at Morningstar.

Besides Yahoo and Countrywide, the Value Trust fund owned 49 other stocks as of December 31. Its top three holdings on that date were Amazon.com Inc (AMZN.O), AES Corp (AES.N) and UnitedHealth Group Inc (UNH.N), with market values of $1.14 billion, $1.02 billion and $975 million, respectively.

Since 2006, Miller has struggled as his bets on housing and financial stocks soured. Investors pulled $10.6 billion from Legg Mason's stock portfolios in the quarter ended December.

The Value Trust was continuing to underperform in 2008, returning a negative 10.6 percent through Monday's close against the S&P 500 index's negative 8.6 percent, Lipper Inc data show.

(Reporting by Murali Anantharaman, editing by Leslie Gevirtz)