Microsoft-Yahoo: Deal or no deal?

With tomorrow's deadline for Yahoo to accept Microsoft's takeover bid approaching, analysts weigh in on what might happen

Three weeks ago, Microsoft Corp. CEO Steve Ballmer threatened to launch a hostile takeover if Yahoo Inc.'s board did not accept the company's $44.6 billion takeover bid.

Now, however, Microsoft seems to have backed away from its tough talking and said it's prepared to withdraw its offer to buy Yahoo if there is no progress by this weekend. "As we said recently to the board, unless there's progress by this weekend, we will reconsider our alternatives," said Chris Liddell, Microsoft's chief financial officer, in a conference call yesterday to discuss the company's financial results.

Yahoo did not respond to a request for comment about the deadline, but the company has said it would consider Microsoft's offer if the software giant upped the ante, which is unlikely to happen. Microsoft declined to comment for this story.

"Although Microsoft could live without Yahoo, its perception is that acquiring Yahoo would put it in a much better position to compete against Google," said Keith Hylton, a professor at the Boston University School of Law. "So while they could live without Yahoo, it's an asset they think is pretty valuable."

While Microsoft is backpedaling a bit on its threat to take its case directly to Yahoo's shareholders, Hylton said it's his guess that Microsoft is serious about acquiring Yahoo as soon as possible and, if all else fails, every option is on the table, including a hostile takeover.

"I don't think this is something they're just going to walk away from at this stage, although there may be a stage where they walk away, like if the takeover takes too long or if there are regulatory obstacles that stand in the way," Hylton said.

On the other hand, Rob Enderle, principal analyst at Enderle Group in San Jose, said it looks like Microsoft is positioning itself to walk away instead of initiating a hostile takeover.

"The rhetoric that is coming out, especially from their CFO, says he is on the side that says we walk away from this, and the CFO gets a significant vote," Enderle said. "And clearly if you look at the internal support for this, it has dwindled within Microsoft by quite a bit, so I think at this point they're likely to walk away."

In addition, Enderle said Microsoft's latest financial results weren't where they needed to be to make this kind of acquisition.

"The design of the bid that Microsoft put forward, as high as it was, was so it would happen quickly," Enderle said. "A hostile [takeover] would be a long, drawn out, proxy fight and antithetical to what Microsoft wanted to accomplish."

He added that it doesn't make sense for Microsoft to drag Yahoo kicking and screaming into its company. "It's just not a good practice, even in a recessionary year, and I think Microsoft is starting to step back and say it thinks there are other things it can do that are looking more attractive," he said.

If there is no deal, Enderle said the market would "reward" Microsoft for stepping away. "Microsoft's stock dropped dramatically on announcement of this deal, and I think that the market would reward Microsoft for walking away and reward them sharply," he said.

However, the prospects wouldn't be so rosy for Yahoo.

"Yahoo craters," Enderle said. "Its stock was largely supported by the bid. The market was trading its shares substantially lower before the acquisition attempt and the market would clearly punish Yahoo for walking away. And I also think the possibility of stockholder lawsuits against Yahoo would be very high."

Marc Edelman, a law professor at New York Law School and a former antitrust lawyer, said there are a number of steps Yahoo could take at this point.

"Yahoo could accept Microsoft's bid; attempt to operate independently; continue its recently announced joint venture with Google, hoping it's not found to violate any antitrust laws; accept a bid from someone else, if there is really one out there; or ask Microsoft to extend its deadline."

Edelman also said there was a strong possibility that Microsoft could walk away from the deal.

He said the fact that Microsoft missed its earnings estimate could mean a few things. It could mean the company needs the merger to start pushing its earnings forward and might indicate that Microsoft would increase its bid. It could also mean that Microsoft expects to have less free cash and won't attempt a takeover bid. Or, he said, it could mean that Microsoft has its own internal issues to handle and adding Yahoo on top of that would complicate matters further. In that case, he said, Microsoft would probably just drop the deal.

"Yahoo is a big loser if a deal does not take place with anybody," Edelman said. "Even though Yahoo slightly beat estimates this past quarter, it has been a troubled company for sometime, and there is no indication in its past earnings reports that it has passed the hump and turned things around. And Yahoo really does need a partner to maintain strength against Google."

If a deal doesn't go through. Edelman predicts that Microsoft would file an antitrust lawsuit against Google and Yahoo if they try to continue their advertising relationship.

But Edelman cautioned that while Google could probably withstand the economic impact of such a lawsuit, Yahoo could not.

"If Yahoo really needs to turn the financial corner, the last thing Yahoo needs is to get sued by Microsoft," he said. "Such a lawsuit will lead to one of two things: additional expenses for Yahoo, or it will cause Yahoo to abandon its temporary relationship with Google, which will put Yahoo right back where it was a few weeks ago where it seemed to an outsider that no doubt Yahoo needed the Microsoft deal."

The IDG News Service contributed to this report.

Copyright © 2008 IDG Communications, Inc.

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