Yahoo Board Spurns Microsoft's Fistful of Dollars

Yahoo's (Nasdaq: YHOO) board of directors has unanimously voted that Microsoft's (Nasdaq: MSFT) unsolicited takeover bid is "not in the best interests" of the Web portal, a widely expected move that could put pressure on Redmond to beef up its US$44.6 billion offer.

Yahoo's board met over the weekend to consider the $31 per share offer, which Microsoft announced on Feb. 1. Yahoo disclosed the vote on Monday, with CEO Jerry Yang explaining the board's reasoning in an e-mail to employees that the company also filed with the Securities and Exchange Commission.

"We believe Microsoft's proposal substantially undervalues Yahoo," Yang wrote, "including our highly recognizable global brand, large worldwide audience, significant recent investments in advertising platforms, future growth prospects, our ability to generate free cash flow and our earnings potential as well as substantial unconsolidated investments (like Alibaba and Yahoo Japan)."

An AOL Merger?

Yahoo did not close the door to considering an enhanced offer or other opportunities -- in fact, reports surfaced Monday that Yahoo may talk with AOL about a possible merger.

"The board of directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders," Yahoo said.

Microsoft did not immediately respond to the Yahoo board's decision. The software giant could decide to convince Yahoo shareholders directly to tender their shares, but that would likely be a difficult battle. Microsoft could also boost the price it is offering, which could put additional pressure on Yahoo's board.

Reassurance From Yang

Yahoo shares were up more than 1 percent in late morning trading Monday to $29.54, while Microsoft stock was down nearly 2 percent to $28.01.

Microsoft's initial offer represented a 62 percent premium over Yahoo's closing stock price the day before the bid was disclosed. The offer came as Yahoo was reeling from a weak earnings report and the news that he had ordered 1,000 jobs cut as part of a restructuring push.

Yang has sought to reassure employees through e-mail messages that Yahoo filed with the SEC.

"We can't let any of the noise we're hearing around this situation distract us from our core mission," he wrote to workers last week. "It's critical that we continue to focus on running our business, executing our strategy and delivering value to all of our users, advertisers and publishers."

More Time?

Yahoo employees may have cause for worry, Sterling Market Intelligence Principal Analyst Greg Sterling told the E-Commerce Times.

"This isn't a merger, it's an acquisition, and the ours-is-better attitude may be the prevailing one in making decisions about what to keep and what to get rid of," Sterling said. "If Microsoft cannot be objective about products and resource allocation, it won't realize the full value of the deal . Regardless, it's going to be a challenging and difficult integration process that will likely see numerous casualties."

Yahoo may believe that with more time it can become more competitive with Google (Nasdaq: GOOG), and Yang may be pressing the board for more time for his ideas to refocus the portal on being the top Internet starting point for users and the "must buy" for advertisers to take hold, Sterling added.

"The combined company may be much stronger in selected areas, but one of them is unlikely to be search -- at least in the near term," he said.

More Money?

In addition to making a tender offer to shareholders or raising its price, Microsoft has other strategic options, including attempting to reshape the Yahoo board by nominating alternative directors for election at the company's annual meeting this spring.

Nevertheless, the offer may need to be raised to closer to $35 per share for Yahoo to budge.

Already, some activist shareholders have begun to raise their voices in favor of a sale of the company. One group, which calls itself Yahoo Plan B, said it controls about 2.1 million shares -- mainly in the hands of former Yahoo employees -- said it has "no desire to see Yahoo continue independently with the current board and management team in place" and said it would offer its shares "to the highest bidder."

The pool of potential buyers for Yahoo appears to be small, so whether a bigger offer is coming may hinge on whether Microsoft feels it can make the purchase pay off through enhanced competitiveness with Google.

"The real problem in my view is the fact that both companies were around before Google was even started, and yet they have lost the search engine lead they once had and have not been able to come up with new ideas that work better than Google," Peter Cohan, president of Peter Cohan & Associates, told the E-Commerce Times.

"Unless the deal unleashes some Google-beating innovation, I am not optimistic about Microsoft being able to earn back the $44.6 billion purchase price," he said.