Yahoo rejects Microsoft bid

SEATTLE/NEW YORK (Reuters) - Yahoo Inc rejected Microsoft Corp’s unsolicited $41.6 billion 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 Inc.

Yahoo said Microsoft’s offer did not properly assess its global brand, its audience of some 500 million 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, the company said. Yahoo said its board was evaluating all its strategic options.

Redmond, Washington-based 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.

A Yahoo! signs sits out front of their headquarters in Sunnyvale, California, February 1, 2008. REUTERS/Kimberly White

Yahoo shares rose 67 cents, or 2.3 percent, to close at $29.87. The stock is now trading at a 3.3 percent 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 percent to $28.21 in Nasdaq trade. The stock has lost 13 percent since the company went public with its bid for Yahoo, losing about $41 billion 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 percent premium to Yahoo’s stock price. The offer was originally worth $44.6 billion, but is now worth $41.6 billion.

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 on the story.

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 percent 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 million Yahoo shares and 129.4 million 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 billion in 2010 from $45 billion in 2007.

The letter, written entirely in lower-case letters to reflect the quirky corporate culture of the Web pioneer, said the company was seeking to drive a 15 percent per year increase in visits to and other central sites.

The company is seeking to keep its 14,000 employees placated as it girds for what is shaping up to be a potentially drawn-out, hostile takeover battle with Microsoft.

Goldman, Sachs & Co, Lehman Brothers and Moelis & Co are working as financial advisers to Yahoo; Skadden, Arps, Slate, Meagher & Flom is Yahoo’s legal adviser. Munger Tolles & Olson is acting as counsel to Yahoo’s outside directors.

Additional reporting by Ken Li and Michele Gershberg in New York, Eric Auchard in San Francisco, Svea Herbst-Bayliss in Boston; editing by Gerald E. McCormick/Andre Grenon