Posted by: Rob Hof on April 5, 2008
Microsoft just dropped the bomb on Yahoo. Microsoft CEO Steve Ballmer today sent a letter (in full after the jump) 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 ended up confusing people more than they clarified things, so it’s not surprising that Microsoft felt the need to go public.
The letter repeats many of the contentions that Microsoft people privately have been saying for some time: that its 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 lawsuit. 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.
What’s more, given that the new slate of directors would be hand-picked 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 cofounder 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.
Henry Blodget at Silicon Alley Insider has some good fast analysis here, and following is the letter from Ballmer:
Dear Members of the Board:
It has now been more than two months since we made our proposal to acquire Yahoo! at a 62% premium to its closing price on January 31, 2008, the day prior to our announcement. Our goal in making such a generous offer was to create the basis for a speedy and ultimately friendly transaction. Despite this, the pace of the last two months has been anything but speedy.
While there has been some limited interaction between management of our two companies, there has been no meaningful negotiation to conclude an agreement. We understand that you have been meeting to consider and assess your alternatives, including alternative transactions with others in the industry, but we’ve seen no indication that you have authorized Yahoo! management to negotiate with Microsoft. This is despite the fact that our proposal is the only alternative put forward that offers your shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers.
During these two months of inactivity, the Internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably, both in general and for other Internet-focused companies in particular. At the same time, public indicators suggest that Yahoo!’s search and page view shares have declined. Finally, you have adopted new plans at the company that have made any change of control more costly.
By any fair measure, the large premium we offered in January is even more significant today. We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.
Given these developments, we believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement on a combination of our companies that will deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers. If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.
It is unfortunate that by choosing not to enter into substantive negotiations with us, you have failed to give due consideration to a transaction that has tremendous benefits for Yahoo!’s shareholders and employees. We think it is critically important not to let this window of opportunity pass.
Steven A. Ballmer
Chief Executive Officer