Posted by: Rob Hof on February 11, 2008
(Update: Microsoft on Monday afternoon lobs the ball back into Yahoo’s court with a content-light letter that neither mentions a counter-offer nor ups the language threat level as far as I can tell. It implies that Microsoft’s standing pat for now in public, at least, but the big question is what talks are happening in private. “The company’s next move will likely be to launch a schmoozathon aimed at winning over several of Yahoo’s big shareholders,” guesses Henry Blodget at Silicon Alley Insider. If Microsoft pushes this to a proxy fight, which would be a mess, one thing would be apparent: It’s not Yahoo’s people, execs or otherwise, that it wants, because this battle would leave people plenty of time to head for the exits. It’s hard to see why Microsoft, having come this far, wouldn’t pony up a few billion more to avoid months of strife—not to mention maybe get back some of the nearly $40 billion in market cap it has lost since the bid. Microsoft shareholders (some of whom are also Yahoo’s largest shareholders) presumably don’t want Microsoft to up its bid too much. But I suspect they may be fine with whatever offer—within reason—gets the deal done sooner than later.)
Not surprisingly, Yahoo came back this morning with a rejection of Microsoft’s $31-a-share unsolicited bid to buy the company. It sounds pretty boilerplate to me:
After careful evaluation, the Board believes that Microsoft’s proposal substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments. The Board of Directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders.
In a report this morning, Citi analyst Mark Mahaney said he’s not surprised by the rejection, since “it’s the Board’s job to extract maximum value, and MSFT’s 62% bid premium was on a 4-year low stock.” He notes that Microsoft also paid very high valuations for aQuantive and its Facebook stake. But most of all, he says, “we believe YHOO’s strategic value to MSFT is substantial” and “it seems no other step could potentially address the scale/liquidity challenge of MSFT’s ad platform.” So the implication is that Microsoft has big incentives to make this happen, even if that means a noticeably higher bid.
Interestingly, Jeff Lindsay of Bernstein Research wrote a short report this morning saying that a tieup with AOL, or at least its ad platform, could bring Yahoo’s value up to $40 a share but that Yahoo’s management could have a tough time convincing skeptical shareholders that it can turn the company around. He thinks an “ugly” proxy fight could ensue.