BUSINESS BLOGS
BUSINESS BLOGS
category: business
01 Feb 2008

It will be very interesting to see what Yahoo!’s Board of Advisors will do in the wake of Microsoft’s unsolicited $44.6B buyout offer.

Given the challenging credit markets, it’s ironic that it is easier for Microsoft to tap the debt markets to raise the kind of cash that would be required to acquire Yahoo! in a cash and stock deal that it would be for many private equity firms.

Yes, Microsoft is sitting on some $20B in cash as of December 31 and prints money quarter-in, quarter-out, but any deal would require MSFT to raise a bit of debt to pay off for the acquisition.

Regardless, while many are questioning the final details of an eventual deal, it is hard to think that this deal won’t be accepted in one shape or another.

Yahoo!’s CEO Jerry Yang is not a fan of Microsoft’s products (or so goes the legend) but Microsoft’s cash is greener these days than any other companies’.

I respectfully disagree with Fred Wilson who says that only a strategic buyer could make the numbers work and a private equity deal is off the table. I think it’s the opposite: a strategic buyer would balk at the notion of diluting so heavily of indebting themselves so much; whereas 2 private equity firms could easily tag up and put in $25B or so and make a move for Yahoo! I do agree that it is harder to make the numbers add up on such a large buyout, and for that reason, MSFT’s offer becomes more and more plausible.

However, one option that Yahoo! is a poison pill it set up in 2001:

Yahoo Inc. has some defense at its disposal should Microsoft Corp’s unsolicited $44.6 billion bid turn hostile, as the Internet company adopted a poison pill in 2001.

Poison pills are defense mechanisms companies put in place to fend off unwanted takeovers, typically working by giving shareholders the ability to buy stock at a bargain price in the event a predator buys a stake above a certain level. That increases the number of shares of the target, diluting the percentage stake the predator holds and making a bid prohibitively expensive.

In March 2001, Yahoo adopted a “stockholder rights plan” under which if anyone buys 15 percent or more of its stock — aside from an agreed bid — shareholders have the right to buy extra shares, according to a filing at the time.

“Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding that acquisition,” according to a Yahoo filing from 2007.

Earlier on Friday Microsoft said it had made a bid to acquire Yahoo for $31 a share, a 62 percent premium above the closing price of Yahoo on Thursday.

Yahoo said it would evaluate the bid.

Should it come to it, Microsoft would have limited success using a hostile offer to get control, said John Laide, product manager of FactSet SharkRepellent, which provides research on corporate activism and proxy fights to financial and legal clients.

However, Laide said that Microsoft may have chosen to time the offer now because it is ahead of Yahoo’s expected annual meeting.

Yahoo does not allow shareholders to call special meetings, meaning that if Microsoft were to launch a proxy fight, it would have to do so at the annual meeting, Laide said.

In addition, as Yahoo does not have a classified board, Microsoft could get board control at one meeting if it were to launch a proxy fight for board seats, Laide said. Classified boards also are a takeover defense mechanism, allowing board members to serve for different term lengths rather than being re-elected annually.

Laide added that Yahoo has advance notice requirements if anyone did decide to nominate an alternate slate of directors, which begins on February 13 and ends March 14.

“We are not commenting beyond what is in the press release,” said a representative for Yahoo in an e-mailed reply when asked about the poison pill.

Yahoo stock closed up $9.20 at $28.38 on Nasdaq. Microsoft stock finished down about $2.15 a share at about $30.45.

The fact of the matter - as YHOO shareholder and former analyst at Goldman Sachs Michael Parekh highlights:

From the perspective of battered Yahoo! shareholders, the bid of course represents a bitter-sweet event. It’s good to see something offered, but it’s obviously a disappointing price given that Yahoo! traded in the mid-thirties only six months ago.

But the case can be made that a lot of existing Yahoo! shareholders are still under water despite the seemingly generous bid by Microsoft.

So all in all from Microsoft’s perspective, the timing for Microsoft’s bid couldn’t have been better. And the timing for Yahoo! ambitions to remain an independent company couldn’t have been worse.

Microsoft’s initiated it’s ‘Bear Hug” with almost exquisite timing.

Not to mention a bid price that almost represents a garage sale for Microsoft. Given that Yahoo!’s holdings in Alibaba in China and Yahoo! Japan can be conservatively valued at $10-15, the argument can be made that the core Yahoo! business is a steal at a $31 price.

It wouldn’t be surprising to see Yahoo! and it’s shareholders hold out for a higher price.

But the problem is time. Shareholders are jubilant right now because from an operational standpoint alone, there was nothing Yahoo! could do to make its price get to these levels… and were MSFT to withdraw the bid, it would send the stock tumbling down. Yahoo! shareholders (present company included) are fed up with Yang and Sue Decker’s incompetence and inability to be candid with shareholders, so they lack time to come up with alternative solutions.

But even if they could get other parties interested, there is no guarantee that the deal is better for employees, let alone all stakeholders. A PE firm, for example, would cut deep into Yahoo!’s 15,000 workforce. A merger with someone like eBay would not address any of the challenges posed by Google. A buyout by someone like AT&T fails to create synergies etc.

Microsoft is not a bad option. As a shareholder, I think that this $44.6B offer is an opening, and not a close, as MSFT is probably willing to raise $10B in debt, leave $5B on its books, and offer a $25B cash and $25B stock deal. Frankly, as the economy hits some turbulence, the offer of MSFT stock at $300B in market cap (and almost $60B in annual revenues) is as enticing as cold hard cash, if not more. Henry Blodget disagrees, saying a rise in price is doubtful, but he was wrong on both Yahoo! and Google’s Q4 2007 earnings report, by a mile.

Can Yahoo!’s founder do much more? Well, co-founder David Filo last reported of 78.2 million shares or 6% of the company. CEO Jerry Yang appears to have around 53 million shares, or 4%, through family and trusts.

The largest institutional shareholder is Bill Miller’s Legg Mason Value Trust, which owns over 118 million shares, representing over 8% of the company. But unlike Yang and Filo, I think Miller would take MSFT stock, or cash, even though some of those 118M shares might remain under water at $31/share.

Ultimately, Yahoo! has options, but triggering the poison pill will mean the end of Yang as CEO and Decker as his sidekick. Say what you want about MSFT, the company can execute and has all of the resources in the world to make Yahoo! fire on all cylinders. Are there risks? If course, but this might be a matter of damned if you do and damned if you don’t.

Disclaimer: long YHOO