Microsoft Nearly Done Asking Nicely

The Web portal was unmoved, however, saying Monday that its board remained open to a deal with the software giant, but not at the original price of around US$44.6 billion.

"We have continued to make clear that we are not opposed to a transaction with Microsoft if it is in the best interests of our stockholders," Yahoo CEO Jerry Yang and Chairman Roy Bostock write in a letter. "Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders."

Three Weeks and Counting

If anything, Yahoo said, the half-stock, half-cash offer has gotten less attractive because of a slip in Microsoft's stock price.

Yahoo was responding to a letter from Ballmer sent over the weekend. In that correspondence, Ballmer says Microsoft will take its original offer off the table and launch a hostile bid to convince shareholders to take the bid directly if Yahoo doesn't act within three weeks.

For his part, Ballmer suggests the deal had essentially improved because Yahoo's own performance was continuing to lag since the offer was made, referring to publicly available data such as page views on its sprawling Web network .

"During these two months of inactivity, the Internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably, both in general and for other Internet-focused companies in particular," he writes. "At the same time, public indicators suggest that Yahoo's search and page view shares have declined."

Getting Hostile?

The epistolary exchange exemplifies the frustrations on both sides of the acquisition drama. Microsoft has been unable to move Yahoo from its original position and is seeing valuable time to make up ground on Google (Nasdaq: GOOG) in the Web advertising market slip away. Yahoo, meanwhile, has been unable to attract other would-be suitors to make competing bids or convince Microsoft to raise its own offer.

"We will not allow you or anyone else to acquire the company for anything less than its full value," the Yahoo executives write. "We consider your threat to commence an unsolicited offer and proxy contest to displace our independent board members to be counterproductive and inconsistent with your stated objective of a friendly transaction."

The back-and-forth raises anew the question of how long the acquisition will take and how long Microsoft will continue to pursue the deal, said Gartner (NYSE: IT) analyst David Mitchell Smith.

"Earlier tech deals offer cautionary tales, but also happy endings," Smith told the E-Commerce Times. Both Oracle's (Nasdaq: ORCL) acquisition of PeopleSoft, he noted, and HP's (NYSE: HPQ) pursuit of Compaq took months to play out and cost the buyers millions in legal fees and proxy costs.

Those deals were closed eventually, however, and despite equally daunting integration battles, in both cases the buyer has enjoyed growth and higher profits as a result of the purchases, he added.

Having the Talk

Yahoo shares fell about 2 percent in morning trading Monday to $27.89, while Microsoft stock was up about 1 percent to $29.44.

Microsoft would consider waging a proxy battle to get shareholders to take the bid and at that time may reduce the premium being offered, Ballmer says in his letter.

"We believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement," he writes. "The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, 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."

The fact that Yahoo expressed its openness to a deal with Microsoft may signal it is comfortable with the discussions that have been held about integrating the companies, Forrester Research analyst Charlene Li told the E-Commerce Times.

Yahoo has been known to be concerned about regulatory concerns -- which could add months more to the time line for closing the deal -- as well as what a post-merger company would look like, she noted. The two companies acknowledged in their letters that representatives have met to discuss such issues, though they seem to disagree on their value, with Yahoo saying the talks show its willingness to negotiate and Microsoft suggesting no substantive progress was made.

"Yahoo isn't an Internet startup anymore, but a very complex and sprawling corporation with layers of management and its own unique culture," Li said. "It may feel an obligation to look out for its employees and what their future will look like, as well as its shareholders."