Legal Docs Show Yang Torpedoed Juicier Microsoft Deal

A Delaware judge ruled Monday that Yahoo (Nasdaq: YHOO) could not keep secret the details of an investors' lawsuit over its spurning of Microsoft's (Nasdaq: MSFT) acquisition efforts.

The complaint alleges that Yahoo turned away a US$40 per share offer to be acquired by Microsoft in 2007 -- months before the software company went public with a far lower bid -- and also declined an offer of a search advertising partnership with Google (Nasdaq: GOOG).

It accuses Yahoo CEO Jerry Yang of working to "delay, to refuse to negotiate in good faith and to erect roadblocks" to Microsoft's offer, while failing to fully explore alternatives.

The suit seeks to hold Yang and others responsible for what shareholders say are direct financial losses tied to the failure of the Microsoft deal . Microsoft last month pulled its $44.6 billion offer, saying Yahoo had refused to negotiate constructively toward a compromise price.

Under Pressure

The suit alleges that Yang ignored the advice of an outside consultant and put in place an employee-severance plan that served as a further hurdle to the deal being completed.

The revelations could help solidify disparate groups hoping to keep alive the sale of the company to Microsoft by replacing the current Yahoo board with directors who support the merger, said N. Venkat Venkatraman, a professor at the Boston University School of Management.

"My guess is that Carl Icahn will have strong support from the disgruntled shareholders -- and the class action suit details seem to indicate that -- and Yang will find himself under pressure," he told the E-Commerce Times. "So, what could Yang do to survive? Show in real convincing ways how Yahoo can be a dominant player without Microsoft. The options are limited, but if he is able to show a way forward that is convincing, then he may just barely get by. Otherwise, I am fairly convinced that an alternate slate of directors will get elected."

Out of Touch?

Word that Yahoo turned down a $40 per share offer is not terribly damaging in and of itself, Venkatraman said. "But taken together with Microsoft's revised offer, it looks like Yahoo was holding on to an inflated valuation based on historical prices that were not adapted to reflect the general downward shift in market prices in 2008."

The activism of key investors such as Icahn, who this week won the support of fellow billionaire and shareholder T. Boone Pickens, and the lawsuit -- which was brought with a Detroit public pension that owns Yahoo shares as the lead plaintiff -- may combine to help give Microsoft its prize at an lower price, he added. "I am not convinced that Microsoft should acquire Yahoo, but Steve Ballmer may declare it a success if he gets it at $30."

In addition to the snubbed higher offer, the court papers also suggest Yahoo rejected an alternative that it has more recently been exploring anew: A search advertising partnership with rival Google.

Looking Back

The portal dismissed the idea on the grounds that it would raise antitrust concerns from regulators. That decision was made just a day before the Feb. 1 announcement by Microsoft that it was launching one of the largest hostile takeover bids in the history of the technology sector.

The decision is contained in a document prepared to help executives answer questions at a company-wide meeting before the news of the Microsoft bid broke. Executives were advised to tell workers that such an outsourcing arrangement might bring short-term gains, but those would come at the expense of longer-term value building.

The investors say in their amended filing to the court that the severance plan would add as much as $2.4 billion in costs were Microsoft to acquire Yahoo, helping to keep the total price being offered down and in turn assuring the offer would not be enough for Yang and others on the board who oppose the merger.

That information is significant because Yahoo later announced a limited test of a search ad program with Google, and striking a formal deal was held out as an alternative and a reason for not going forward with the Microsoft offer.

Forcing the Issue

It's ironic that Yahoo would have resisted a Google deal on antitrust grounds, since such concerns are also being raised with respect to the Microsoft-Yahoo tie-up.

In fact, while a Yahoo-Google partnership might raise flags in the search space, the Microsoft purchase of Yahoo could draw regulators' attention across several areas, David Lisi, a partner with Howrey, told the E-Commerce Times. That Yahoo used that as a reason to steer clear of a Google deal underscores that it could be a larger issue down the road as well.

"Certainly, there will be concerns about whether and how Microsoft intends to bundle Yahoo technology and products with its existing operating system and about Microsoft's search engine being combined with Yahoo -- although Google may still have a clear dominant market position there," he said. "There is also a real concern likely to be raised with respect to free e-mail and IM services since Google does not have market power there, and this will make Microsoft/Yahoo the clear 800-pound gorilla."