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Yahoo Board Rejects Microsoft's $44.6 Billion Offer
Yahoo! Inc., owner of the second most used Internet search engine, rejected a $44.6 billion takeover offer from Microsoft Corp. as too low, pressuring the world's largest software maker to raise its bid.
After a 10-day review, the board decided the $31-per-share offer "substantially undervalues" the company, Sunnyvale, California-based Yahoo said today in a statement. Yahoo didn't say what price it would accept. Yahoo co-founder Jerry Yang, who took over as chief executive officer in June after a 35 percent drop in the stock in 2006, said in an e-mail to employees today that investments and acquisitions will help attract more visitors to Yahoo's sites. Worldwide online advertising sales may double to $81.1 billion by 2011, according to Piper Jaffray & Co. Google Inc.'s sales rose almost seven times faster than Yahoo's last year. "Yahoo thinks they're worth more because of the plans they've implemented that have yet to come to fruition," said Daniel Taylor, an analyst at research firm Yankee Group in Boston. "The board is saying, 'We think we can keep the company together and do far better with it than Microsoft ever will.'" In the three-paragraph statement, Yahoo said its ad technology, future prospects and investment portfolio mean the company is worth more. The decision was unanimous and the board is "continually evaluating" options to boost the stock's value, Yahoo said. The rejection leaves Microsoft weighing whether to raise the price, give up, or take the offer straight to shareholders. A person familiar with the matter said last week that Microsoft may seek to oust Yahoo directors should they reject its offer. Microsoft spokesman Bill Cox declined to comment. Higher Offer Yahoo wants at least $40 a share, the Wall Street Journal reported over the weekend. UBS AG's Heather Bellini, the top- ranked software analyst by Institutional Investor, said last week Microsoft may have to bid $34 to $37. "The proposal is not in the best interests of Yahoo and our stockholders," Yang wrote today in the e-mail to his 14,000 employees. Yahoo's "substantial cash flow," expected to rise by at least 10 percent in 2009, gives the company the financial flexibility to stay independent, he wrote. The offer is 62 percent more than Yahoo's stock price before the cash-and-stock bid. Microsoft shares have declined, lowering the value of the stock portion. Yahoo rose 62 cents to $29.82 at 2:14 p.m. in Nasdaq Stock Market trading, exceeding the current $28.83-a-share value of Microsoft's offer. Microsoft will let holders choose cash or stock, at a ratio of about 50-50. Microsoft fell 37 cents to $28.19. Yahoo $40? Yahoo may be worth as much as $40 a share, Sanford C. Bernstein analyst & Co. Jeffrey Lindsay said in a note today. Handing over the Web search business to Google may add $7 a share, job cuts could produce another $6, and buying part of Time Warner Inc.'s AOL would generate $1 to $5, Lindsay said. "The challenge for Yahoo's management team is to come up with a convincing enough story that shareholders will accept it in preference to Microsoft's cash and equity offer," he said. Yang, 39, has resisted letting go of the company he co- founded in 1995 as a graduate student at Stanford University. He replaced Terry Semel as CEO in June and planned to craft a strategy to revitalize Yahoo. An upgraded search engine, new mobile-phone software and plans to win sales in social networking have yet to gain investor confidence. Profit Declines Yahoo posted eight straight quarters of profit declines and spent years trying to catch up with Google in Web queries and the lucrative market for ads linked to search results. Sales at Yahoo rose 8.5 percent last year to $6.97 billion, while Google's revenue gained 56 percent to $16.6 billion. Microsoft may not be ready to give up. Together, Microsoft and Yahoo would control more than a quarter of the market for animated ads and colorful display banners at the top of Web pages. Google hasn't made much progress there, giving the combined company a way to challenge Google and start going after emerging markets such as mobile-phone ads. "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," Microsoft CEO Steve Ballmer said in a letter to Yahoo's board that was made public when the offer was announced Feb. 1. Yahoo's AdvisersYahoo is getting advice from bankers at Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Moelis & Co., and lawyers at Skadden, Arps, Slate, Meagher & Flom LLP. The law firm Munger Tolles & Olson LLP is counseling Yahoo's outside directors. Microsoft is working with Morgan Stanley, Blackstone Group LP, Simpson Thacher & Bartlett LLP and Cadwalader Wickersham & Taft LLP. Yahoo might seek help from rivals, soliciting other bids or seeking partnerships with Rupert Murdoch's News Corp. or Google to thwart Microsoft, according to analysts including Stanford Group Co.'s Clayton Moran. The Times of London reported yesterday that Yahoo may restart merger talks with AOL. Google CEO Eric Schmidt contacted Yang to suggest a partnership, the New York Times reported Feb. 4. A partnership with Mountain View, California-based Google may allow Yahoo to outsource its search service, shedding the costs of running its own search engine and sharing ad revenue with its larger rival. Google spokesman Matt Furman and Time Warner spokesman Ed Adler declined to comment. While a Google partnership is an option, it would face stiff regulatory scrutiny, Moran said. News Corp. isn't interested in bidding for Yahoo, Murdoch said on a Feb. 4 conference call. That means Yang's options probably won't pan out, said Andrew Frank, a New York-based analyst at researcher Gartner Inc. By Ari Levy and Dina Bass - Bloomberg
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