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Microsoft to Yahoo!: Surrender or else

Big Steve turns the screw

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Microsoft has told Yahoo! that it has three weeks to walk down the aisle - or it will strong-arm the reluctant bride into marriage. If this ends in a proxy battle, Microsoft will almost certainly return with a lower offer than the $44bn bid originally tabled on February 1.

In a letter to the Yahoo! board delivered on Saturday, Steve Ballmer, Microsoft’s CEO, said the substantial premium reflected in our initial proposal [62 per cent more than the closing price immediately before the bid] anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.

Ballmer voiced his company’s frustration with Yahoo!’s dilly-dallying, noting that there has been “no meaningful negotiation to conclude an agreement”.

Yahoo! thinks the bid undervalues the company and has sought a white knight. News International and Time Warner’s AOL have looked at teaming up with Yahoo! – and rejected the idea. Microsoft’s pockets are too deep and the bid on the table is indeed a hefty premium. And Wall Street doesn’t think much of the alternative – an independent Yahoo!. On Friday, Yahoo! shares fell on speculation that Microsoft was preparing to walk away or lower its bid.

According to Ballmer, the bid premium – intended to solicit a quick and friendly transaction – is even more significant today. In his letter he notes:

During these two months of inactivity, the Internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably, both in general and for other Internet-focused companies in particular. At the same time, public indicators suggest that Yahoo!’s search and page view shares have declined. Finally, you have adopted new plans at the company that have made any change of control more costly.

Old plans make it more difficult too. In 2001, Yahoo! installed a poison pill to ward off hostile takeovers. Would-be predators are limited to just 15 per cent of Yahoo!'s shares in a tender offer, Marketwatch reports. This is why Microsoft would have to conduct a proxy war to replace Yahoo!’s board with one of its own choosing. We suspect that Yahoo! shareholders will plump for jam today. But first Yahoo!’s board must let them make that decision. Expect a class action if Microsoft wins the day, against the Yahoo! board, and tables a lower bid.

This way for the Ballmer letter. ®

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