By Jason Simpkins
Over the past several days Yahoo! Inc. (YHOO) and Microsoft Corp. (MSFT) have reached a critical impasse in takeover negotiations. Ultimately, to make a deal, Microsoft might be forced to take its offer directly to Yahoo shareholders in the form of a proxy contest, or simply raise its offer to lure Yahoo to the negotiating table.
Yahoo rejected Microsoft's $44.6 billion takeover offer Feb. 11, saying the bid substantially undervalued the company's worth. The $31-per-share 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.
Since then, Yahoo has engaged a number of other competitors such as Time Warner Inc. (TWX) and News Corp. (NWS) about possible partnerships, but with little success. Microsoft, eager to challenge Google Inc.'s (GOOG) market dominance, has grown impatient and Saturday threatened to take its case directly to Yahoo's shareholders.
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In a letter to Yahoo's brass, Microsoft Chief Executive Officerexpressed his disappointment with what he perceives as a lack of cooperation.
"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," Ballmer wrote. "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."
Ballmer pointed out that economic conditions have deteriorated since February, as have Yahoo's web traffic and market value, making now the time to negotiate a definitive agreement.
"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," Ballmer wrote.
"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," he added.
Yahoo responded yesterday (Monday), emphasizing in a letter to Ballmer that it does not oppose a transaction with Microsoft, so long as the offer fully reflects the value of Yahoo. Chief Executive Officerand Chairman of the Board , who penned the letter, also rejected Ballmer's assertion that business has deteriorated.
"Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo," they said.
"We are steadfast in our commitment to choosing a path that maximizes shareholder value, and we will not allow you or anyone else to acquire the company for anything less than its full value."
Yang and Bostock also characterized the threat of a proxy contest to displace independent board members as "counterproductive and inconsistent with [the] stated objective of a friendly transaction."
"We are confident that our stockholders understand that our independent board is best positioned to objectively and knowledgeably evaluate our company's alternatives and to maximize value," the letter continued.
Microsoft insists there is no reason to raise its bid because Yahoo has no competing offers, but it may be forced to do just that if it wants to avoid the fiscal and social costs associated with a proxy contest.
"Microsoft doesn't want to spend a year negotiating, playing cat and mouse with the Yahoo board and another year to close this transaction to get all the regulatory approvals," Colin Gillis, an analyst at Canaccord Adams, told Bloomberg.
Yahoo has not yet announced the date of its next shareholders' meeting. All 10 of the company's board members will be up for re-election. The last meeting occurred June 12, and under Delaware law, the company must hold one every 13 months.
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