My Soap Opera

May 19, 2008 - 10:11 AM PST

Originally posted May 5, 2008 on www.boumanblog.com

If you have just returned from Mars, let me update you. Microsoft withdrew their offer of $33 per share ($47.5 Billion) for Yahoo. Ever since rumors of this deal first surfaced, I’ve been enamored with any news related to the topic. Even after the news of Microsoft’s withdrawn offer, I still believe there is much more drama to ensue. Who needs Days of Our Lives when I can open up the business section of any periodical?

The Facts (in a tiny nutshell)
- Microsoft made their initial offer for Yahoo in January 31st (public Feb. 1) at $31 a share. Yahoo was selling for $19.18 at the time (62% premium)
- Yahoo rejected the bid saying Microsoft undervalued Yahoo
- Microsoft increased their bid to $33 ($2.3 billion price increase)
- Yahoo rejected offer again, demanding no less than $37 a share
- Microsoft withdrew offer

Why Microsoft wanted Yahoo
Microsoft has long dominated the personal computer era with their cutting edge technology, which has translated into a powerful business for founder, Mr. Bill Gates. However, Microsoft has fallen behind (drastically) to competitor Google as the computer market moves from desk top products to internet software. In its efforts to increase its market share of internet searches and increase their online presence, Microsoft attempted to buy out the one competitor who could help them close the gap in one fell swoop. By buying Yahoo, Microsoft’s market share would be a lucrative 31% but still a far cry from Google’s 58% strangle hold on the market. The buyout would also invigorate a corporate giant that was beginning to plateau and resemble another computer giant that tumbled from the top…IBM.

Why Yahoo resisted Microsoft
Yahoo was never looking to sell. In order for Microsoft to make the deal without a proxy fight they had to wow Yahoo’s board of directors with “an offer they couldn’t refuse.” Yahoo rebuffed Microsoft’s initial offer stating it was being undervalued. After (alleged) negotiations Microsoft increased their bid to $33 a share for a grand total of $47.5 billion. Yahoo again stated that this was too low a price and that their stockholders would not agree to anything less than $37 a share (this has been refuted by some reports, which claim some shareholders would have sold at $34-35). Yahoo has claimed they were open to a sale and are pursuing other options but the bottom line was their own company valuation was much higher than Microsoft’s. [According to the NY Times, Yahoo was also weary of federal regulators blocking the deal and wanted a higher offer to “hedge against that risk.”]

Microsoft’s options
Microsoft had the option and (conceivably) still does have the option of a hostile proxy fight. As Marc Andreessen outlines, unlike many public companies, Yahoo does not have a staggered board of directors election. Therefore, in a single year all the seats on their board can turnover. If Microsoft chose to do so, they could nominate their own qualified directors (which they allegedly have been in talks with former CEOs, COOs, and CFOs about the posts). If Yahoo stockholders favor Microsoft’s deal, they would be inclined to vote in these alternate directors and approve the deal. It seems as though Steven A. Ballmer has for the time being declined this option due to the repercussions it may have (i.e. Yahoo making undesirable business decisions like partnering with Google).

The Aftermath and Future
The Monday after Microsoft’s withdrawn offer was sure to affect Yahoo’s stock; it was not a question of “if” but rather how much? At the end of the day, the answer was 15%, as Yahoo closed at $24.37. Now the question is how much farther will the Yahoo slide? How will Jerry Yang restore stockholder confidence and back up his valuation of company? Will he buy back the stock like some investors are calling for? Is that even feasible since there is no way Yahoo can afford to buy back shares at the $37 a share they have valued themselves at? Does Yahoo partner with Google in a limited online advertising partnership or will a Yahoo/AOL merger heat up? Lastly, does Yahoo’s stock drop so low that Microsoft comes back into play (some think they’re not really out of it, using the withdrawn offer as a negotiating ploy) and buy up Yahoo at less than the initial $31 a share? What will come of Yahoo's newly announced May 15th deadline for director nominations for the July 3rd shareholder meeting? So many questions and so few answers! It’s like a sitcom’s season ending cliffhanger.

My Two Cents
As aforementioned, I am absolutely intrigued by this situation with these corporate tech giants. It’s hard for me to pin point my reasons since I have no financial ties to either company; perhaps it’s just the consumer in me who uses Microsoft/Google/Yahoo software and applications? As recent history indicates, large mergers are not always successful (see TimeWarner/AOL). Regardless of Yahoo’s current stock price, they are a major player in the online game and any merger involving them will have a massive impact in the business sector and our individual lives. I am giddy with excitement to see what Yahoo does, whether it’s a merger, partnership, or proxy fight. However, I personally feel that ultimately Steven A. Ballmer will have the last say and at some point Microsoft will obtain Yahoo (for the record, I'd like to see a proxy fight). But what do I know? I’m just a lonely soul typing on Microsoft Word, looking up articles on Google, and listening to music on Yahoo.

Update May 19, 2008


The deadline to nominate alternate directors for the Yahoo board has recently passed. Microsoft has not pursued the proxy fight path. Rather they are looking at a less aggressive option, to collaborate with Yahoo on internet advertising. However, uber capitalist Carl C. Icahn, has made it public that he will induce a proxy fight in an effort to revive the merger. Just after the news of the failed first attempt, Icahn bought approximately 50 million shares of Yahoo. Microsoft has yet to publicly comment if they will engage in talks with Yahoo if Mr. Icahn's proxy fight is successful. Icahn nominated a full slate of impressive alternate directors by the May 15th deadline. They are as follows: Lucian A. Bebchuk, a law professor at Harvard; Frank J. Biondi Jr., a former chief executive of Viacom and Universal Studios; Mark Cuban, the owner of the Dallas Mavericks basketball team and a founder of Broadcast.com; Keith A. Meister, an executive at Icahn Enterprises; Brian S. Posner, the chief executive of the equity firm ClearBridge Advisors; and Robert K. Shaye, co-chairman and co-chief executive at New Line Cinema. Carl Icahn won't let the idea of a Microsoft/Yahoo die in the near future. I will anxiously be awaiting news as it becomes available.

I definitely did not see a third party coming into play. I thought that Microsoft was going to do the proxy fight solo. Maybe Steven Ballmer is the puppeteer behind the scenes but the Carl Icahn twist had made this soap opera even more fantastic. I mentioned that I wanted to see a proxy fight, but this is much better than I could have expected. Hold on to your stocks ladies and gentlemen, it's going to be a wild and crazy ride.