Posted by: Rob Hof on February 9, 2008
Yahoo’s board is set to send Microsoft a letter Monday rejecting the software giant’s $45 billion bid, according to the Journal on Saturday. From the apparent wording from a source—that the bid is “massively undervalued” given the relatively recent swoon in Yahoo’s stock price before the bid and the risks of the bid getting rejected on antitrust grounds—it sounds like this is pretty standard negotiating fare, not a realistic intention to go it alone. After all, it’s the board’s fiduciary duty to try to get the highest possible price—reportedly north of $40 a share, considerably higher than Microsoft’s $31-a-share bid.
Although things could get ugly for awhile, I still think this may only delay the inevitable. Given Yahoo’s limited options, it’s probably a done deal, once they reach a price that avoids Microsoft having to go truly hostile.
My colleague Jay Greene, who covers Microsoft, weighs in:
This, of course, becomes a risky game of chicken for Yahoo. I don’t think Microsoft will walk away from this. But let’s say Microsoft chooses not to increase the bid. Yahoo execs would face a mountain of shareholder lawsuits, particularly if we really are headed into a recession and online advertising slows. The chances of Yahoo stock hitting anything close to $30 without this bid seems very remote for a very long time. Clearly, Microsoft has the wherewithal to increase its bid. And, given Ballmer’s comments about how much it needs Yahoo, I assume that it will. But if Microsoft walks, Yang and the board are in deep trouble.
Kara Swisher at Boomtown thinks Yahoo is really fighting to stay independent, not just negotiating. They’d probably want to appear that way even if they know they have little chance to avoid the Microsoft bear hug. But if Yahoo’s executives couldn’t pull off a turnaround when it was only shareholders nagging at them, it seems unlikely that they’re going to be able to do it under this kind of pressure and limited timeframe.
It’s clear that shareholders have run out of patience for anything but a near-term payoff. And even if many of those shareholders already have bailed out, with the shares picked up by arbitrageurs and short-term traders, those guys aren’t exactly patient either.
A number of people, commenting on various blogs, seem to believe that Yahoo has zero options. Not really true. And I don’t think doing an ad deal with Google is the only one.
Microsoft has a huge incentive not to make this more hostile than it is already, because it’s clear that many Yahoo people (and by most accounts, not all the best people have left yet) will either walk or make the integration process a living hell for Microsoft if the deal isn’t done in at least a cordial manner. Borrowing a few extra billion dollars to let Yahoo save face will be a small price to pay for at least tacit Yahoo cooperation and a faster integration process.
And it’s widely believed that Microsoft left adequate room to up its bid. As HipMojo’s Ashkan Karbasfrooshan (who holds Yahoo shares) has noted in the latest installment of his extensive analysis of the financial angle of this deal, an appealingly round $50 billion deal, more than $5 billion over Microsoft’s initial bid, would require only about $36 a share, just $5 over the current bid and within striking distance of the $40 a share Yahoo’s board apparently is throwing out. “This is why this deal is very much alive,” he says. He adds in yet another post:
… is there a danger that MSFT backs off? Yes, but it’s slim. If MSFT were to pull its bid, YHOO would fall to $20. But shareholders would be so fumed that if anyone came out with a $25/share offer, they would be forced to take it. MSFT understands this so it won’t do that. They’re close, they can smell blood, they know if they up the bid even remotely the pressure will be too great for YHOO to refuse the second offer.
Peter Kafka at Silicon Alley Insider, which has covered this deal well, agrees:
The “board determined that the offer massively undervalues Yahoo” language here is carefully choreographed. What the board really determined, of course, is that it can’t just reject Microsoft’s offer outright without being accused of violating its fiduciary duty—and that it should therefore try to hold Microsoft up for whatever it can get. The real message here is that Yahoo is willing to sell the company, and it has countered Microsoft’s offer with a price of $40 a share.
This is a smart move. It will be interesting to see whether Yahoo’s letter to Microsoft contains the same $40 language, as this would obviously make the message not a “rejection” of the bid but merely a price negotiation. We suspect Yahoo won’t put the $40 language in the letter, but in any event, they have just countered Microsoft’s bid.
So what will happen? The weakness of Yahoo’s position is that there are no other bidders even at $31 a share. So Microsoft’s likely counter-move here will be to say that it thinks its offer is “very attractive” and that the offer still stands. As Rupert Murdoch did when the Bancrofts rejected his bid for Dow Jones, Microsoft will then likely begin assessing the positions of some of Yahoo’s largest shareholders.
And then it gets really interesting. …
Silicon Alley Insider's Henry Blodget opines on the apparent game-playing going on, including the orchestrated leaks. As for how Microsoft will likely respond:
Microsoft might therefore choose to take another page out of Rupert Murdoch's playbook by saying, politely, that it's not going to raise its offer and that it hopes to persuade Yahoo's shareholders to take it. And then, as Yahoo's stock drops back to the mid-20s and shareholders begin to grumble that Yahoo should have just accepted the bid, Microsoft will slowly ramp up its charm offensive.
After the Bancrofts rejected Murdoch's bid for Dow Jones, Murdoch quietly launched a full-court schmooze. Specifically, he met with the Bancrofts and reassured them that he wasn't going to destroy their baby. In Yahoo's case, there are no controlling shareholders to win over, but there are plenty of big ones. And Steve Ballmer has already met with the largest--Capital Research and Management--last week.
The stated reason for the Ballmer-Cap Group meeting, as leaked to the New York Post, was Cap Group's desire to see if Ballmer was considering raising his Yahoo bid. Cap Group also owns 6% of Microsoft, and it was reportedly concerned that if Ballmer raised his bid, Cap Group would lose more on its Microsoft position than it made on its Yahoo one.
This may have been one reason for the Ballmer-Cap Group meeting, but there were undoubtedly others (Ballmer wanting to take Cap Group's temperature). News of the meeting was also obviously leaked for a reason (Microsoft and Capital Group are perfectly capable of keeping their mouths shut unless they have some ulterior motive). Our guess? Team Microsoft wanted to tell Team Yahoo that Yahoo's largest shareholder was already pressuring Steve Ballmer NOT to raise his bid.