Posted by: Rob Hof on June 2, 2008
A Delaware judge has unsealed details in a shareholder lawsuit against Yahoo for allegedly taking undue steps to block Microsoft’s unsolicited bid for the company. You can see the lawsuit here at the site of Bernstein Litowitz Berger & Grossmann, the law firm suing Yahoo on behalf of shareholders, as well as the letter from the judge, William B. Chandler III, unsealing the suit.
The main news revealed in the suit is Yahoo’s own estimate of the cost of the employee severance package it had instituted after Microsoft’s bid, a move seemingly intended to make the deal more expensive. How much more expensive? According to Yahoo’s internal estimate, provided by an outside consultant it hired: $462 million to $2.1 billion at Microsoft’s original offer of $31 a share. The plan gives all 13,800 Yahoo employees cash and accelerated stock grants in the event of a takeover and a change in their jobs.
The details could provide some ammunition for the proxy fight being waged by corporate raider Carl Icahn, who seeks to replace Yahoo’s board in hopes of spurring Microsoft to return with a friendlier deal to buy Yahoo.
I’m doubtful the cost of the plan was the major factor in Microsoft walking away, as the suit implies. But even for Microsoft, which claimed to be willing to pay $47.5 billion for Yahoo but not a penny more, it’s not quite chump change. The prospect of a Yahoo-Google deal clearly rankled Microsoft CEO Steve Ballmer much more than this severance agreement, since he mentioned the Google deal but not the severance package in his May 3 letter to Yahoo withdrawing the bid. But the package surely didn’t help, either. In an Apr. 5 letter to Yahoo, Ballmer criticized the plan, and Microsoft’s representatives repeated the criticism when Microsoft pulled out on May 3.
Most interesting, Yahoo’s outside compensation consultant questioned the severance plan. The suit claims the consultant, Compensia, provided “pushback” on the broad nature of the plan, which involves all employees. The firm indicated that the potential cost of that plan as a percentage of the Microsoft bid—3.2%—was much more than the usual 1%, though an unnamed example in the suit’s exhibits indicated 2% or so wasn’t unusual in smaller deals. However, Compensia President Tim Sparks was cited as sending an email to Yahoo director of compensation Carl Statkiewicz regarding Yahoo’s plan to provide full acceleration of stock options for all employees, not just a select group. Sparks’ response: “That’s nuts.” Important update: In an Associated Press story, Yahoo says that remark actually referred to “a part of Yahoo’s cost estimates that assumed its entire work force would depart after a Microsoft takeover.” (Yahoo confirmed this account with me.)
Indeed, the high-end, $2.1 billion estimate would be only if there were a 100% reduction in force and Microsoft’s offer were $31 a share. If a 100% reduction in force means what it sounds like—laying off all Yahoo employees, or all of them leaving voluntarily and claiming their job had changed substantially—that seems highly unlikely. (In other words, nuts.)
At a more likely 15% or 30% layoff or employee departure rate, and assuming a middle-ground Microsoft offer of $35 a share, the cost would be $514 million or $845 million, respectively. At the original $31 a share, the costs at 15% and 30% reductions would be $462 million and $757 million.
Either way, though, this is a real cost, and it sure sounds like Yahoo intended the plan to be, at the very least, a big incentive for Microsoft to do a higher-value, friendly deal. Perhaps it was even intended to kill the deal. One interesting tidbit in the suit is that Yahoo’s non-employee directors—that is, all of them, except for Yahoo cofounder and CEO Jerry Yang—have a direct financial interest in Yahoo holding out for a higher price than $31 a share, or even $33 a share. Options granted to directors in 2005 and 2006, at between $32.92 and $36.75 a share, would be worthless, though options granted at $27.05 in June 2007 would be worth something even at $31 a share.
The suit also claims that during a meeting last October, Yang and the board discussed “recent communications about a third party’s interest in a transaction with the Company” during which Yang got the OK for a “standby” press release. The release would say that Yahoo would consider the offer but that it had “very recently determined tha tit was not the right time for the company to seek to sell itself.” As with all of Yahoo’s other examples of resistance, though, it’s tough to tell if Yang and the board were dead-set against any deal or merely preparing for an attempt to get a better offer.
For all their juicy details, the excerpted emails about the severance plan don’t seem to provide smoking-gun proof that Yang and the board were dead-set against any deal with Microsoft whatsoever, which is the essential claim of the suit. The rest of the suit depends on hints from often-anonymous sources cited in newspaper articles. I’m no lawyer, so take this with a grain of salt, but I think the suit, like most shareholder suits, is no slam-dunk win for the plaintiffs.
Yahoo told me it’s disappointed with the judge’s ruling, and said the excerpts of emails between Yahoo and its compensation consultant, cited in exhibits in the suit, are taken out of context. Yahoo said it plans to release more complete email exchanges later today or tomorrow.
In any case, the severance doesn’t seem high enough to be the key dealbreaker. After all, Microsoft was said to be ready to spend $1.5 billion in incentives to keep key engineers. And it not only continued its pursuit of Yahoo after the plan was instituted on Feb. 12, but it also upped its bid months later.
So I’m doubtful the details of the suit will have a big impact on a Microsoft-Yahoo deal that seems likely to come to a head before long.