Its directors have three weeks to come to the bargaining table or Microsoft will launch a fight to replace them
Microsoft (MSFT) just dropped the bomb on Yahoo (YHOO). Microsoft CEO Steve Ballmer on Apr. 5 sent a letter giving Yahoo's board three weeks before it initiates a proxy fight, including nomination of a new slate of directors likely to approve the deal.
"Microsoft's preference has always been to offer a speedy and friendly transaction," says a person familiar with Microsoft's thinking, reiterating the essence of the letter. "Microsoft has tried to engage, but Yahoo's board has refused to enter into substantive negotiations. There is a difference between a meeting and a negotiation."
The letter comes just hours after several planted leaks by Microsoft, variously claiming that it might drop the bid, lower the bid, or, most recently, would not lower it. Clearly, those leaks (BusinessWeek.com, 4/4/08) ended up confusing people more than they clarified things, so it's not surprising that Microsoft felt the need to go public.
The Clock Is Now Ticking
The letter repeats many of the contentions that Microsoft people privately have been saying for some time: that the company's original offer at a 62% premium was more than fair, that Yahoo has no clear alternatives, and that it's not engaging in serious negotiation.
What's new is that there's now a clock ticking. And that clock seems likely to get both sides to the negotiating table. Yahoo clearly wants to avoid a situation in which it could easily be forced into a much worse deal, one that would no doubt trigger a raft of shareholder lawsuits. Microsoft craves a relatively friendly deal that would make the whole process go faster. That's crucial to avoid accelerating the exodus of key Yahoo people and to keep Google from gaining ground while the fight grinds on.
Microsoft also sent the clearest message yet about its insistence that its original offer was more than fair, and that it will not "bid against itself," as people close to Microsoft have put it. One person familiar with Microsoft's position says that if the company is forced to go the proxy-fight route, it in all likelihood could lower its offer, because by that time, Yahoo's stock will almost certainly have fallen substantially from the post-offer premium of the past two months.
A Peaceful Deal Remains a Good Bet
What's more, given that the new slate of directors would be handpicked by Microsoft, that may not be an empty threat. That is all the more likely because many large Yahoo shareholders hold even more Microsoft stock and no doubt don't want the premium for Yahoo to go too high.
So, it now appears that the battle is truly engaged. It's still a good bet that the deal will happen, perhaps even at a premium that would get an apparently recalcitrant Yahoo co-founder and CEO Jerry Yang to go along peacefully. It would seem to be a small price for Microsoft to pay to get a deal done that it clearly believes is absolutely crucial to its long-term future.