Sunday, February 10, 2008

Yahoo to Reject Microsoft Buyout Offer, May Find Few Options

By Ari Levy and Zachary R. Mider

Feb. 10 (Bloomberg) -- Yahoo! Inc., the Internet company that has
failed to crack Google Inc.'s dominance of Web search, plans to reject
a $44.6 billion takeover bid from Microsoft Corp., a person familiar
with the situation said.

The board spent a week reviewing the $31-per-share unsolicited offer
before deciding it was too low, and directors are likely to reject it
tomorrow, said the person, who declined to be identified because the
discussions aren't public. Yahoo wants at least $40, the Wall Street
Journal reported yesterday.

The decision steps up pressure on co-founder Jerry Yang to present
investors with a strategy to revive a stock that lost half its value
in the two years before the offer. He may look to outsource its search
efforts to Google or find another buyer, though analysts said it is
unlikely that any other options will emerge and Microsoft may make a
higher offer to win.

``A lot of this is gamesmanship on the part of Yahoo,'' said Scott
Kessler, an equity analyst at Standard & Poor's in New York who
recommends holding Yahoo and buying Microsoft. ``Microsoft is well
aware that Yahoo doesn't have any other options. What this is about is
how much Microsoft wants Yahoo and how much time they're willing to
wait to get this deal done.''

Microsoft, the biggest software maker, could pay $40 for No. 2
Internet search company Yahoo, Kessler said. It is more likely the
companies reach a deal for less, he said. UBS AG's Heather Bellini,
the top-ranked software analyst by Institutional Investor, said last
week Microsoft may have to bid $34 to $37.

Yahoo spokeswoman Diana Wong said yesterday the company doesn't
comment on rumors or speculation. Microsoft spokesmen Frank Shaw and
Bill Cox didn't return calls yesterday.

Yang Resists

Yahoo, based in Sunnyvale, California, has posted eight straight
quarters of profit declines and spent years trying and failing to
catch up with Google in Web queries and the lucrative market for ads
linked to search results.

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.

Still, 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 chief executive officer in June and intended to craft a
strategy to revitalize Yahoo.

Hostile Measures

Yahoo is betting Microsoft won't take hostile measures to win the bid,
the Journal said, even though the software maker has indicated that is
a possibility. A person familiar with the matter said last week that
Redmond, Washington-based Microsoft may seek to oust Yahoo directors
should they reject its offer.

``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 rose 16 cents to $29.20 Feb. 8 in Nasdaq Stock Market trading
and Microsoft added 44 cents to $28.56.

The offer is 62 percent more than Yahoo's stock price before the bid.
The shares have climbed above the value of the cash-and- stock bid,
showing shareholders expect a higher price. Microsoft plans to let
investors choose cash or stock, at a ratio that will end up being
about 50-50.

Microsoft shares have declined since the bid, lowering the value of
the stock portion and pushing the total value of the deal to about
$29.08 a share.

Yahoo is getting financial advice from Goldman Sachs Group Inc.,
Lehman Brothers Holdings Inc. and Moelis & Co., according to two
people familiar with the matter. Morgan Stanley and Blackstone Group
LP are counseling Microsoft.

Google Possibility

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.

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 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.

The U.S. Justice Department is ``interested'' in reviewing the
antitrust implications of a Yahoo-Microsoft transaction, spokeswoman
Gina Talamona said after the bid was announced. Neelie Kroes,
commissioner of competition for the European Commission, said her
agency also would scrutinize a deal.


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