April 9, 2008 / 11:19 PM / in 10 years

Little Microsoft sweetener might win Yahoo

NEW YORK (Reuters) - Yahoo Inc’s second-biggest shareholder does not like Microsoft Corp’s ultimatum to the Web company to negotiate or face a lower bid, but he may not want much more than the software company has offered.

Bill Miller of U.S. asset manager Legg Mason Inc said he will support Yahoo management’s plan to remain independent if Microsoft lowers its bid for Yahoo as its Chief Executive Steve Ballmer threatened to do in a weekend letter.

But the star money manager, who oversees the Legg Mason division that holds roughly 7 percent of Yahoo shares, said in the Wall Street Journal that Microsoft could have a “big impact psychologically” on Yahoo shareholders with a sweeter bid even if it is only “up a buck.”

The move appeared to soften a stance by the most prominent investor backing the Yahoo board’s hard line that Microsoft needed to increase its offer substantially.

Miller has insisted that fair value for Yahoo is around $40 per share, but his new comments come at a time when Yahoo shareholders seem resigned to selling to Microsoft.

“Yahoo is unlikely to fetch $35 to $40. It is still possible we will get a more attractive price” than Microsoft’s offer, said Cowen and Co analyst Jim Friedland.

He cautioned that the risks of Microsoft walking away outweigh any potential higher offer, but also agreed that Miller’s angry tone could attract backers, especially after Yahoo said on Wednesday it would test using Google Inc’s search.

“Not only do we have a likely Google deal, but with Bill Miller demanding a higher offer, you could also start to see other Yahoo shareholders start to line up behind him,” Friedland said.

Yahoo’s board of director has rejected Microsoft’s unsolicited offer, initially worth $31 a share in cash and stock, saying it “substantially undervalues” the company. Due to declines on Microsoft’s share price, the offer now stands at $29.24 per Yahoo stock.

Microsoft said that, if Yahoo did not negotiate the final terms of the deal within three weeks, it would go hostile and take its offer straight to Yahoo shareholders, a move that could spur the software giant to lower its bid.

Legg Mason spokeswoman Mary Athridge confirmed some of Miller’s comments to the Wall Street Journal. She said he would support a decision by Yahoo’s management to remain independent if Microsoft lowered its price, but he did not say he would counsel the company to remain independent.

However, Miller’s Legg Mason fund has significantly more invested in Yahoo than in Microsoft.

Financial risk management analysis company RiskMetrics Group found that, close to 90 percent of Yahoo’s institutional shareholders have a cross-holding in Microsoft, including most of the top 20, and generally they have significantly more money invested in Microsoft.

As a result, those investors may prefer that Microsoft not overpay for Yahoo.

Piper Jaffray analyst Gene Munster said in a report issued on Monday that a majority of 20 institutional shareholders of Yahoo surveyed would prefer Microsoft’s current deal over the company remaining independent.

“Yahoo’s shareholders are ready to sell to Microsoft. At this point we are just arguing about the price. Shareholders clearly understand the merits of the proposed deal, but I think Yahoo management is not there yet,” said Ryan Jacob, portfolio manager at the Jacob Internet Fund, which owns about 150,000 shares of Yahoo.

Microsoft has said its offer is full and fair. Every $1 it raises its offer price for Yahoo would add $1.4 billion to the total size of the deal, which is currently valued at $42 billion.

Writing by Daisuke Wakabayashi; Editing by Andre Grenon

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