Yahoo Board Rejects Microsoft Bid; Surveys Options

By Jason Simpkins
Associate Editor

Yahoo! Inc. (YHOO) formally rejected Microsoft Corp.'s (MSFT) $44.6 billion takeover offer, yesterday (Monday). At the same time, speculation involving possible tie-ups with other industry leaders such as Time Warner Inc.'s (TWX) AOL and Google Inc. (GOOG) resurfaced.

After 10 days of review, Yahoo's board unanimously decided that the $31 pershare offer, "substantially undervalues" the company. Yahoo didn't name a figure the company brass would deem acceptable but many analysts believe it should be around $40 a share.

Microsoft's offer valued Yahoo at a 62% premium on Feb. 1, but it should also be noted that Yahoo traded at $31 a share as recently as November.  In its statement Yahoo also said it was worth more because of recent acquisitions, technological developments and the firm's investment portfolio.

"Yahoo thinks [it's] worth more because of the plans [it has] implemented that have yet to come to fruition," Daniel Taylor, an analyst at Boston-based research firm Yankee Group, told Bloomberg News. "The board is saying ‘We think we can keep the company together and do far better with it than Microsoft ever will.'"

Soon after the rejection, the Times of London reported that Yahoo had engaged in merger talks with AOL, Google and Walt Disney Co. (DIS). The paper did not identify the source of the information. 

Time Warner announced last week that it planned to break AOL's Internet access business apart from its Web portal and advertising business. While AOL's Internet access business has struggled, the company's Internet content and online advertising business could be a good fit. AOL owns such web sites as MapQuest and TMZ. It also owns several advertising technology firms.

Talks between Yahoo and AOL faltered last year because of differences over price, the Times of London said. Also, any takeover attempt from Yahoo that valued AOL at more than $20 billion would also benefit rival Google, which purchased a 5% stake in the company in 2006.

Meanwhile if Yahoo were to make a deal with Google directly, it's likely the merger would come under intense regulatory scrutiny, as the resulting venture would control nearly three-quarters of U.S web-search traffic.

While it's certainly feasible that other parties are interested in working with the embattled Yahoo, the possibility that the company is just trying to extract a higher premium from Microsoft before folding cannot be ruled out.

Last week, in a note to clients, Citigroup Inc. (C) analyst Mark Mahaney said that it is reasonable to assume that Microsoft will be willing to increase its offer in coming weeks.

"In a hostile deal, the acquirer usually does not lead with its best and final offer and we would not be surprised to see Microsoft sweeten the pot somewhat to make the decision easier for Yahoo's board," the note said.

News and Related Story Links:

• New York Times:
  Yahoo Said to Be Restarting Talks With AOL

• Bloomberg:
  Microsoft May Take Case for Yahoo Bid to Shareholders

• Money Morning:
  Microsoft Could Raise Bid to Further Tempt Yahoo!

• Money Morning:
  Google Chimes in on Microsoft's Bid For Yahoo