SEATTLE/SAN FRANCISCO Yahoo Inc has three weeks to accept Microsoft Corp's $31-a-share cash-and-stock offer or Microsoft may lower its bid and take its offer to Yahoo investors, Microsoft said on Saturday.
Microsoft Chief Executive Steve Ballmer said in a letter dated April 5 and addressed to Yahoo's board of directors that "now is the time" to negotiate final terms of a deal, which, valued at more than $40 billion (20 billion pounds) would mark the biggest-ever takeover in the high-tech industry.
"If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors," Ballmer wrote.
Then he threatened to reduce Microsoft's offer if Yahoo failed to meet the deadline: "That action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal."
The letter marks the tightening of the noose in a classic Wall Street bear-hug merger strategy, wherein Microsoft aims to convince Yahoo directors to negotiate a friendly deal or else face a battle for their jobs at Yahoo's next annual meeting.
Yahoo's board is reviewing the letter, said a person close to the company. Directors of the Sunnyvale, California-based company have rebuffed Microsoft's original offer, saying the bid undervalues Yahoo and that it is seeking alternatives.
Ballmer said Microsoft was growing impatient more than two months after the Redmond, Washington-based software powerhouse made its unsolicited takeover offer for Yahoo. At the time, the bid represented a 62 percent premium to Yahoo's share price.
"Steve Ballmer is an emotional guy and the emotion comes through and it's frustration," said Kim Caughey, senior analyst at Fort Pitt Capital Group, a Microsoft shareholder. "I really don't think it's going higher than $31. That ship has sailed."
NOT LOOKING ANY YOUNGER
The Microsoft letter argues the economy and the market for Internet stocks have deteriorated in the intervening period, and that Yahoo's share of Web search and advertising business has declined, referring to industry market reports.
"During these two months of inactivity, the Internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably."
The deadline falls on April 26, four days after Yahoo and two days after Microsoft report their quarterly results.
Ballmer said Yahoo's board, despite its efforts, had failed to woo a competing offer from "others in the industry."
Yahoo has held talks with News Corp and Time Warner Inc's AOL division about possible deals, but those discussions appear to have yielded nothing yet.
A Yahoo investor, whose firm met with Yahoo management earlier this week and declined to be identified, said the company emphasized the deal with Microsoft involved regulatory risks that would undercut a merger's potential value.
The management, according to the investor, presented alliances with AOL and Google as possibly better options.
Brendan Barnicle, who follows Microsoft for Pacific Crest Securities, said that by removing the hope of a higher bid, Microsoft had given Yahoo directors the legal cover to accept Microsoft's existing offer and fend off shareholder lawsuits.
It's part of a highly choreographed dance and parallels the take-it-or-leave-it bidding strategy Oracle Corp has used to win a string of deals to consolidate the software industry.
"The big overhang on Microsoft stock has been that they would have to raise their bid," Barnicle said.
Yahoo has adopted measures that make a merger with Microsoft more costly, Ballmer complained.
A few weeks after Microsoft's offer, Yahoo's board put in place a generous severance plan, commonly known as a "golden parachute," to all employees if the company was sold.
The original 62 percent premium to Yahoo's share price on the day the offer was announced has declined.
Yahoo shares closed on Friday at $28.36 each, while Microsoft ended the week at $29.16. Both trade on Nasdaq.
Based on Friday's closing price, the premium to Yahoo's stock is about 45 percent, while the current total value of Microsoft's offer is $42.2 billion in cash and stock.
Microsoft has argued that the offer's premium to Yahoo's stock has, in fact, increased, because the Web pioneer's stock would have fallen in lock-step with its online rivals. Shares of Google Inc, Yahoo's most direct competitor, have fallen more than 16 percent since Microsoft's offer.
Microsoft's view of business conditions at Yahoo runs contrary to Yahoo's own outlook for itself. Last month, the company went public with a rosy revenue outlook for the next two years and appealed directly to shareholders during a road show that Microsoft's offer was not enough.