Microsoft spurned, but will likely win Yahoo in the end

Offer is a 'bonanza,' say experts, but board wants the pot sweetened

Now that Yahoo Inc. has formally turned down Microsoft Corp.'s unsolicited $44.6 billion takeover bid, some industry observers say the most likely outcome is that Microsoft will raise its offer and Yahoo will be forced to accept it.

Today, Yahoo's board told Microsoft that its $31 per share offer undervalued the company and said it would continue to evaluate other "strategic options" in order to maximize value for its shareholders.

Microsoft called Yahoo's decision "unfortunate," and said its offer gave shareholders "superior value." The unsolicited bid was a 62% premium over Yahoo's closing price the day before the Feb. 1 offer was made. Since then, Yahoo's stock has risen in value and was trading just above $29 this morning.

Microsoft, in a statement, also warned that it might pursue a hostile takeover. "Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value inherent in our proposal," the company said.

Microsoft believes that acquiring Yahoo will position it to better compete with Google Inc. in the online advertising market. For its part, Google has been doing what it can to scuttle the Microsoft takeover bid, including playing up the antitrust component of the deal. Google could not be reached for comment today.

"We have Microsoft's initial offer of $31 per share and we have what Yahoo wants, which is about $40 per share. They're looking for the amount of money Microsoft had offered them in a previous round," said Rob Enderle, an analyst at San Jose-based Enderle Group.

Although Enderle said the deal will most likely go through, Yahoo won't get as much money as it wants from Microsoft.

"Microsoft will counteroffer," he said. "This is a negotiation. Microsoft's initial offer was lower than Yahoo wanted, and Yahoo wants an offer that's higher than Microsoft is willing to pay. Now they do their dance and we see on whose side it ends up, typically someplace in the middle. But right now it looks like it will happen."

Guy Creese, an analyst at Burton Group in Midvale, Utah, said that while Yahoo is looking for more money from Microsoft, the Internet company is also looking to Google to form some kind of partnership.

"I think they have several options, and it will be interesting to see how it plays out," Creese said.

Anthony Sabino, professor of law and business at St. John's University in New York, said Microsoft's offer was a "bonanza beyond belief" for Yahoo's shareholders, and if Microsoft sweetens the pot a bit more the board is under a legal obligation to consider it because its job is to maximize value for it shareholders.

"It's incredible for Microsoft to come and make this kind of offer," Sabino said. He added that although the Yahoo board and CEO Jerry Yang don't want to become part of Microsoft, they probably won't have a choice.

"It should not be a surprise that that there is a powerful dissident group within Yahoo that has told the board they want it to consider this offer because it is a lot of money and they're not going to let the board turn it down," he said. "And not only are they right in terms of the business sense, because you don't turn away money that's offered to you in this princely sum, it's also a question of what the corporate law in this country provides."

And Sabino said that law is very specific. He said once a company is in play, which means another company has made a bid for it, its board has a duty to the shareholders to try to obtain the best price it can.

"There's no doubt in my mind that Yahoo is in play. There is an interested bidder or bidders for the company, so they're on the auction block," Sabino said. "Yahoo doesn't want to be there, Jerry Yang doesn't want to be there, the rest of the board doesn't want to be there, but being in play isn't something you usually have a voluntary choice about."

Sabino said the board can probably squeeze more money out of Microsoft, but at some point it will have to accept the offer.

"Microsoft will probably sweeten this offer to get what they want, but sooner or later Yahoo is going to say, 'OK, fine. We give up' because once the offer maxes out, what are they going to do? They simply can't [reject the offer] and say, 'We're better off going it alone.' They can't do that to the shareholders," he said.

As for Yahoo partnering with Google, Sabino said that deal wouldn't pass regulatory muster.

David Ferris, president of San Francisco-based Ferris Research, said he didn't think Yahoo was right to turn down Microsoft's offer.

"The thing is, it's a very large amount of money," he said. "I think it was a good offer for stockholders, but maybe Yahoo is just trying to get a better offer. But I'm not so sure they were right to turn it down."

Copyright © 2008 IDG Communications, Inc.

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