Microsoft plans to intensify its pursuit of Yahoo this week when it authorizes a proxy fight to oust Yahoo’s board, meaning the 19-day-old acquisition attempt will soon turn a darker shade of ugly, according to The New York Times.
The proxy fight will cost Microsoft between $20 million and $30 million, much less than having to significantly up its offer for Yahoo, The Times reported Tuesday, quoting anonymous sources.
The aggressive move would be consistent with Microsoft’s statements hinting that it’s willing to acquire Yahoo via hostile means if necessary. Yahoo’s board rejected unanimously Microsoft’s offer, calling it too low.
Yahoo and Microsoft declined to comment on The Times’ article.
If Microsoft plans to wage a proxy fight, that would reveal that the company is getting impatient with Yahoo’s resistance, said industry analyst Greg Sterling of Sterling Market Intelligence.
“Microsoft feels that it made a fair and very generous offer, and that Yahoo doesn’t have a lot of options,” Sterling said.
Entering into a proxy battle has its downsides, he said. It will delay the acquisition process and, by making the process nastier, could prompt valuable employees to flee, Sterling said. “To what extent does this aggressiveness poison the well? I don’t know,” he said.
But clearly, Microsoft is ready to shift into an alternative plan if it’s convinced that the best-case scenario of wrapping up the acquisition promptly won’t happen with Yahoo’s current board, he said. “Microsoft had probably factored this step into its strategy. I’m sure it’s a calculated decision,” Sterling said.
On Feb. 1, Microsoft offered to pay $31 per share for half of Yahoo’s outstanding shares in cash—about $22.3 billion—and 0.9509 of a Microsoft share for the other half. Microsoft’s half-cash/half-stock offer to Yahoo was valued at about $44.6 billion at the time it was made; Yahoo’s share price was $19.18 at the time.
However, the bid’s value has dropped to about $41 billion as the price of Microsoft’s stock has fallen from $32.60 at the time the offer was made. It was trading at $28.77 on Tuesday morning. At the same time, Yahoo’s stock has surged, erasing the bid’s original premium. It was trading at $29.32 on Tuesday morning.
In the proxy fight, Microsoft would hire a proxy solicitor to urge Yahoo investors to kick out board directors, The Times reported, adding that all Yahoo directors are up for nomination this year.
After investing heavily in recent years in its Internet business and failing to achieve its desired goals, Microsoft is now convinced that it must acquire Yahoo in order to compete against common rival Google, especially in search advertising, the largest online advertising market pie, and one that Google dominates.
As of the end of 2007’s third quarter, Google had almost 25 percent of the U.S. Internet advertising market, up from almost 21 percent in 2006’s third quarter, according to IDC. Meanwhile, Yahoo’s share during this period dropped to 11.3 percent from 12.3 percent, while Microsoft’s declined to 5.2 percent from 5.8 percent, according to IDC.
In search usage, Google held a commanding 62.4 percent of queries worldwide, followed by Yahoo in a very distant second place with 12.8 percent, according to comScore. Microsoft ranked fourth with 2.9 percent, after Baidu (5.2 percent).
Unquestionably, Yahoo would be a major win for Microsoft in the display ad market. In November, Yahoo ranked first in the U.S. in display ad impressions with a 19 percent share, while Microsoft came in third with 6.7 percent, after News Corp.’s Fox Interactive (16.3 percent), according to comScore. Google took seventh place with 1 percent.
However, skeptics question whether acquiring Yahoo will yield the expected benefits, considering the complexity of integrating the two businesses, cultures and technology platforms and the fact that Yahoo has had severe internal problems that have stumped its most seasoned executives. In addition, some aren’t sure that a unified Microsoft/Yahoo will have a better chance to compete against Google.
Yahoo co-founder and CEO Jerry Yang, who is also on the board of directors, has been urgently looking for and considering alternatives to a Microsoft acquisition soon after Ballmer and company made their bid.
Reports—all attributed to anonymous sources in various media outlets—have emerged in the past two weeks that Yang has held conversations with Google, AOL and News Corp., exploring various deals that would allow him to reject Microsoft’s offer.
The key is that the shareholder value created by a competing deal would have to at least match the value of Microsoft’s deal. Otherwise, Yahoo would make itself liable to shareholder lawsuits that alleged the board had failed to perform its fiduciary duty.
So far, as experts have analyzed the potential value to Yahoo of outsourcing its search advertising to Google, merging with AOL or selling a 20 percent stake to News Corp. in exchange for MySpace, the consensus has been that none of those scenarios comes close to matching Microsoft’s offer.