Yahoo to reject Microsoft offer

11-02-2008

by The Register

The board at Yahoo plans to reject Microsoft's unsolicited USD44.6 billion takeover offer, the Wall Street Journal reports.

Quoting "a person familiar with the situation," the publication states that after a series of meetings over this weekend, the board thinks the software giant's bid "massively undervalues" Yahoo.

Microsoft boss Steve Ballmer went public on 1 Feb with a cash and share offer worth, at the time USD31 for each Yahoo share. This was 62 percent higher than Yahoo's share price the day before the offer was announced.

Fearful that Microsoft plans to "steal" the company by taking advantage of Yahoo's recent low share price, the WSJ source suggests that Yahoo's board is digging in for a long battle. The company is unlikely to consider any offer below USD40 per share, the source said.

At USD40 a share, the offer would be a 109 percent premium to the USD19.18 closing price of Yahoo's shares the day before the original offer was announced. Yahoo shares have not traded above USD40 for two years.

The way these things work, Microsoft will already have worked in an increased offer into the bid equation. But will it shell out another USD12 billion to pay USD40 a share? For Yahoo? The way these things used to work is that Microsoft walks away if it fails to win over the Yahoo board. Software companies, after all, are not supposed to do hostile bids. That was until Oracle changed the rules of the game, with its successful pursuits of Peoplesoft, Siebel and BEA.

Does Microsoft have the stomach for a battle? So far, the market has reacted unfavourably to its Yahoo overtures, marking down shares 10 percent. This in turn has lowered the value of its offer. Yahoo's shares closed on Friday, 8 February, at USD29.20, fuelled by heavy trading by so-called arbitrageurs. They will want to see a deal -- otherwise they lose money on their newly-acquired stakes. And in the absence of any white knights, the only serious contender to buy Yahoo is Microsoft.

Of course, Yahoo could, as many pundits note, cosy up to Google instead, by subbing out its search advertising business to its more successful Silicon Valley neighbour. In the extreme unlikelikehood that this gets through competition authorities, such a deal could release USD10 billion-USD12 billion to Yahoo shareholders, according to analysts. Is the rest of Yahoo really worth more than USD30 billion?

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