Tit for Tat: Microsoft and Icahn "Set the Record Straight"

Posted by: Rob Hof on July 14, 2008

Yahoo came out swinging yesterday and today with an impassioned defense of its rejection of Microsoft’s latest offer, an improved bid for Yahoo’s search operations. Now, Microsoft has fired back with a statement of its own (full text after the jump), which seems to indicate its offer was indeed serious, if poorly played.

Microsoft claims Yahoo’s account of the latest offer, which Yahoo said was a 24-hour, take-it-or-leave-it ultimatum, was inaccurate. Microsoft says Yahoo Chairman Roy Bostock told Microsoft CEO Steve Ballmer during a call last Thursday that “with substantial guarantees on the table and an increase in the TAC (traffic acquisition cost) rate, there are the pillars of a search only deal to be done” and asked Ballmer to submit a new search-only deal proposal. That’s pretty interesting, since in Yahoo’s statement Saturday, Bostock had reiterated Yahoo’s preference for a full merger deal at $33 a share, adding that a search deal with Microsoft would be complex and risky.

Microsoft also says its proposal did not include “changes to Yahoo’s governance,” in sharp contrast to Yahoo’s claim that the deal involved putting a new board in place. However, given Microsoft’s recent, overt alliance with activist investor Carl Icahn, who just filed definitive papers calling for a new board—as well as Microsoft’s previous comments that it would no longer negotiate with Yahoo’s current board—it’s understandable Bostock believes Microsoft also wants a new board. But Microsoft insists that wasn’t part of this deal. Are you confused too?

Meanwhile, Icahn filed his own version of events (also after the jump). He castigated Yahoo for not taking a deal that is—despite being contingent on Yahoo traffic (which Henry Blodget at Silicon Alley Insider believes makes Microsoft’s revenue guarantees meaningless)—still noticeably better than Microsoft’s previous search deal offer. He concludes:


“I believe that, just like the $33 per share offer that was refused by Yahoo! in early June, refusing the Microsoft offer for the Yahoo! search business is also another grave mistake that will be deeply regretted. Our company is on a precipice and our Board seems ready to take the risk of seeing it topple - ARE YOU, THE REAL OWNERS OF YAHOO!, WILLING TO TAKE THE SAME RISK?”


One thing seems clear in all this: Yahoo and Microsoft just don’t know how to talk to each other, and Icahn didn’t exactly serve as a great facilitator. I guess in this case, they’re not talking to each other; they’re talking to shareholders, pure and simple. But the level of dispute on terms, valuations, even what each side has said in talks is so high that it sure seems to go well beyond the usual kabuki theater of large-deal negotiations. Maybe they need a marriage counselor more than investment-banking advisers.

In any case, the heat is on all three parties to get something done before the Aug. 1 Yahoo annual meeting. After five months of back-and-forth, it’s not at all clear what’s going to settle this mess.

Actually, it’s shareholders who will settle this mess. And I think they’re going to need to see more specifics from Icahn—either a near-guarantee of a Microsoft deal, which clearly he failed to provide over the weekend, or a more concrete idea of how he’s going to run Yahoo in the absence of a Microsoft deal, which he has not provided. Blodget thinks Icahn, by messing up Microsoft’s latest deal, has already lost. But I still think we’ll be hearing more from Icahn this week. And Microsoft. And Yahoo. Will this ever end?

Here's Microsoft's statement:

Microsoft Sets the Record Straight

REDMOND, Wash. – July 14, 2008 - On the evening of July 12, Yahoo! Inc. released a statement relating to recent discussions involving Yahoo!, Microsoft Corporation, and Carl Icahn. Microsoft believes the statement contains inaccuracies that need to be corrected. Among other things, the enhanced proposal for an alternate search transaction that we submitted late Friday was submitted at the request of Yahoo! Chairman Roy Bostock as a result of apparent attempts by Mr. Icahn to have Microsoft and Yahoo! engage on a search transaction on terms Mr. Icahn believed Microsoft would be willing to accept and which Microsoft understands Mr. Icahn had discussed with Yahoo!.

Specifically, on Thursday afternoon, July 10, Mr. Bostock called Steve Ballmer’s office to arrange a call. On that subsequent call, Mr. Bostock told Mr. Ballmer that “with substantial guarantees on the table and an increase in the TAC (traffic acquisition cost) rate, there are the pillars of a search only deal to be done.” Mr. Bostock encouraged Mr. Ballmer to submit a new proposal to Yahoo! for a search only deal reflecting these terms.

After considering Yahoo’s request and taking into account Yahoo’s previous feedback about our prior search proposal, Microsoft determined late Friday to propose an enhanced search transaction. This proposal included significant revenue guarantees, higher TAC rates, an equity investment and an option for Yahoo! to extend the agreement over a 10 year period.

Microsoft’s proposal did not include changes to Yahoo’s governance.

At the time Microsoft submitted its enhanced proposal, Microsoft asked that Yahoo! confirm whether it would agree that the enhancements were sufficient to form the basis for the parties to engage in negotiations over the weekend on a letter of intent and more detailed term sheets. This discussion has been mischaracterized as a take it or leave it ultimatum, rather than a timetable in order to move forward to intensive negotiations. Yahoo! informed Microsoft on Saturday that it had rejected the proposal.

And here's Icahn's letter to shareholders:

Dear Fellow Yahoo! Shareholders:
Over the years I have attempted to make changes at many companies but I have yet
to see a company distort, omit and twist events and facts in the manner that
Yahoo! has done in their press release issued Saturday night, July 12th.
During the last week, Goldman Sachs called me a number of times asking me to
relate to them any transaction that Microsoft might be interested in transacting
with Yahoo! I discussed with them the possibility of doing a "Search only" deal
wherein Microsoft would purchase "Search" from Yahoo! and pay Yahoo! for any
searches that would originate from a Yahoo! content page. Yahoo! felt that a
deal of this nature would be very interesting, but only if Microsoft would
guarantee the revenue that Yahoo! now received. This would obviously be a great
deal for Yahoo! because Yahoo! would, for five years, receive a minimum of the
$2.3 billion they are currently receiving as long as they continued to supply
the page views and affiliate traffic they now had. Heretofore, Microsoft had
been unwilling to even come close to making this guarantee. However, after I
negotiated with Steve Ballmer for the better part of a week, he agreed to the
guarantee. He also agreed to commit $7.7 billion dollars to the transaction
(consisting of a $1 billion payment for "Search", a $2.8 billion loan and a $3.9
billion tender offer to Yahoo! shareholders). Under the transaction, Yahoo!
shareholders would receive $16.25 per share in distributions (consisting of cash
and securities) and be left with a content company which would have a minimum
guarantee of $2.3 billion per year of "Search" revenue from Microsoft and cost
saving synergies from exiting the "Search" business that Yahoo! has publicly
stated would be $750 million per year (excluding the benefits from reduction of
stock compensation and other non-cash items). However, Microsoft believes the
synergies from Yahoo! exiting "Search" would be far superior and that Yahoo!'s
2009 GAAP operating income would exceed $2 billion. Microsoft would be making a
substantial equity investment in the remaining company at a valuation of $19.50
per share. Furthermore, Yahoo! would be spared the great expense of maintaining
"Search" as well as having to spend billions in developing new technology to
compete with Google and Microsoft - which it is highly doubtful they would be
able to do successfully. Additionally, Yahoo! would be able to avoid the great
risk of seeing "Search" continue to lose market share and eventually melt away.
I spoke to Goldman Sachs and Roy Bostock on Thursday concerning the breakthrough
with Microsoft. A call to discuss the details of the transaction was then set up
among Microsoft, Yahoo! and me on Friday afternoon, July 11th. However to my
surprise and consternation, on the Friday call Yahoo!, instead of being
interested in the Microsoft offer, seemed to me to be focused on who would be
running Yahoo!. Finally, Steve Ballmer suggested that we not spend the rest of
Friday afternoon on corporate governance. "First tell us if you like the deal,"
he said.
THE YAHOO! PRESS RELEASE
a. Yahoo! in their Saturday night press release makes much of the fact that
they were only given 24 hours to decide on the Microsoft offer because of
the time constraints relating to the proxy fight, but neglects to mention
that they were offered more time if they would be willing to postpone the
annual meeting for a short period.
b. Yahoo! conveniently neglects in its press release to tell you about the
extremely important above mentioned guarantees that Microsoft was willing
to make;
c. Yahoo! tells you in their press release that a condition of the deal was
the immediate replacement of the current board and removal of top
management. Yahoo! neglected to mention we were willing to discuss keeping
a number of the current board members and Jerry Yang as Chief Yahoo!
d. Yahoo tells you the Microsoft proposal precludes the potential sale of all
Yahoo! however, they neglect to tell you that that train has left the
station in that Microsoft is no longer willing to buy all of Yahoo! with
the current board overseeing the company.
e. Yahoo!'s press release states that "this odd and opportunistic alliance of
Microsoft and Mr. Icahn has anything but the interest of Yahoo stockholders
in mind", raising the innuendo that I am on Microsoft's side in this
manner. That is patently ridiculous. Since Yahoo! failed to consummate a
transaction with Microsoft this year, I have spent hours and hours
attempting to get the parties together because I believe that it is
beneficial to Yahoo! shareholders to have a deal with Microsoft and I have
worked hard trying to make it happen. It is important to note that my funds
and affiliates own 70 million shares of Yahoo and own no shares of
Microsoft or Google while the current board outside of Jerry Yang owns only
the shares they have received from Yahoo for being directors. My interests
are aligned with yours and not Microsoft and I think it is in our interest
to have this transaction consummated so that we can get value much in
excess of the recent and current market for Yahoo! shares.
In June, Microsoft apparently made a $33 per share offer for all of Yahoo! which
was met with Yahoo countering at $37, thereby rejecting the $33 offer.
Amazingly, before Microsoft decided that it would not buy all of Yahoo! with
this board in place, it offered $33 and was turned down. The Yahoo! press
release indicates that Yahoo!, in rejecting the current Microsoft proposal,
stated that it would do a deal in which the entire company was sold to Microsoft
for $33 per share. It is hard to understand why it turned down $33 and is now
willing to accept it. It is the same obfuscation that is so prevalent in the
rest of the press release. DON'T BE FOOLED.
I believe that, just like the $33 per share offer that was refused by Yahoo! in
early June, refusing the Microsoft offer for the Yahoo! search business is also
another grave mistake that will be deeply regretted. Our company is on a
precipice and our Board seems ready to take the risk of seeing it topple - ARE
YOU, THE REAL OWNERS OF YAHOO!, WILLING TO TAKE THE SAME RISK?
The following are the details of the offer that was presented by Microsoft to
Yahoo! on Friday.
$/share should:
Value to Yahoo! Shareholders No Shares Tender All Shares Tender
---------------------------- ---------------- -----------------
1. Yahoo! distributes $12.5B $9.00 $9.00
in Asian Assets
2. Yahoo! distributes $3.5B $2.50 $2.50
in cash to shareholders
Comprised of $1B from
Microsoft for search, $2.5B
of cash on hand
3. Microsoft offers $2.8B in $2.00 $2.00
preferred debt at 5%
4. Microsoft tenders $3.9B for - $2.77
Yahoo! shares at $19.50
5. Remaining Shares $19.50 $16.73
$16.73 = effective value of
shares after tender
(86% x $19.50
TOTAL VALUE TO YAHOO! SHAREHOLDERS $33.00 $33.00
-------------------------------------------------------------------------------
SEARCH DEAL WOULD INCREASE YAHOO! EBIT TO OVER $2B IN CY09 - REMAINING SHARE
VALUATION REPRESENTS 14.5 X GAAP PRE-TAX INCOME
o Microsoft acquires Yahoo! search assets for $1B in cash
o Microsoft is the exclusive provider to Yahoo! and its partners of paid
search, contextual search and algo search for the term of the deal
o Microsoft guarantees Yahoo! the greater of:
(a) 85% net revenues for the first three years, and 70% of net
revenues thereafter, or
(b) $2.3B per year of after-TAC revenues scaled down in event of
underperformance of Yahoo! US Homepage views and affiliate rev.
o At the end of 5 years, the agreement expires unless Microsoft or
Yahoo! exercise one of the following:
- Microsoft may extend the agreement for 5 years should Microsoft
guarantee $3B net revenues per year
- Yahoo! may extend the agreement for 5 years with Microsoft bound
to guarantee $1.6B per year
o Yahoo! no longer needs to support the costs of employees or
infrastructure of the search business.
o Microsoft will cooperate with Yahoo! to allow Yahoo! to collect data
from its web search to support its display advertising business.
o Microsoft will provide Yahoo! with a limited, non-exclusive IP license
for use of search IP in support of its display advertising platform.
o Yahoo! will guarantee that Microsoft's search will retain equal or
greater prominence throughout the Yahoo! site as Yahoo! search does
today.
Steve Ballmer has made it clear to me that if a new board consisting of my
nominees were to be elected, Microsoft would be willing to enter into
discussions immediately regarding a transaction along the lines described above.
If and when elected, I strongly believe that in very short order the new board
would, subject to its fiduciary duties, be approving an offer along these lines
for its shareholders.

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Reader Comments

Rich

July 15, 2008 11:28 AM

This Microsoft-Yahoo-Icahn situation has become absurd. Intelligent, rational businessmen? They aren't acting like it.

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