It’s Time to Get Serious, Steve: Enough of YHOO’s Evasion

I’m surprised it took this long. But finally Steve Ballmer and the Microsoft board appears to be getting serious about its offer for Yahoo. From the Wall Street Journal:

Microsoft Corp. Chief Executive Steven A. Ballmer threatened Yahoo
Inc. directors with a hostile takeover of the company if they don’t
reverse course and agree to a deal within the next three weeks.

In a letter delivered on Saturday, Mr. Ballmer
lamented Yahoo’s unwillingness to negotiate a deal, saying “that by
choosing not to enter into substantive negotiations with us, you have
failed to give due consideration to a transaction that has tremendous
benefits for Yahoo!’s shareholders and employees.” (Read the letter.)

If the board doesn’t begin talks within three weeks,
Microsoft would be “compelled” to take its offer directly to
shareholders and wage a proxy fight to replace Yahoo’s directors, Mr.
Ballmer wrote. He also implied that the offer Microsoft would make
after the deadline would be lower than the one now on the table.

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In his letter, Mr. Ballmer suggests that worsening
economic conditions have reduced Yahoo’s market value, adding that “by
any fair measure, the large premium we offered in January is even more
significant today.” Microsoft’s original $31 per share offer
represented a 62% premium to where Yahoo’s shares had been trading
before the offer.

Many Yahoo shareholders have been holding out for a
higher offer and it is unlikely they would embrace a deal for less than
the original one. Still, Mr. Ballmer’s threat underscores the
frustration on the part of the software maker with the lack of any
progress.

I’ve been barking up this tree since the offer was first announced. I’ve also been mystified as to why Microsoft didn’t take a firmer stand earlier on. As far as I’m concerned the idea that tough tactics don’t work in technology mergers is a bunch of malarkey. As long as you embrace the key people and gain control of valuable products and technology, you can get as hostile in technology as you can in any other industry and preserve value (assuming the deal makes sense, which they seldom do). Larry Ellison doesn’t make it his practice to be all huggy-kissy in technology M&A deals, and it has worked for him. This is because he has a crack integration planning and execution team and only buys stuff that fits in well with his existing product portfolio.

From a strategic perspective, here is what I recommended Microsoft do back in February:

If for no other reason than to show how shoddy governance practices and
weak shareholder advocacy will not stand, Microsoft should stand firm
to its current $31 offer and ram it through with the help of a good
proxy solicitor and a world-class PR campaign (one that is better than
that for many of its products, hopefully). It will be a boon to
shareholder rights’ advocates everywhere. They have put a fair offer on
the table. No other competing transaction comes close (Yahoo and News
Corp. - give me a break). The “just say no” defense doesn’t work here
because of countless and persistent management miscues and no plan. If
Microsoft goes away Yahoo stock will plummet like a stone, causing
lawsuits to come out of the woodwork like you would not believe. Get it
done, Steve. Take no prisoners. This is what you’re good at. Like your
other Pacific Northwest friends, Just Do It.

Yahoo’s lame tactics have only been outshone by Microsoft’s inexplicable passivity. Microsoft has been holding a straight flush from Day 1, but have acted as if they’ve got ace high. But even the sleeping giant can be awakened, and it was when they rolled over, looked at the calendar and realized that Yahoo has been giving them the Heisman for two months now. As I said from the beginning, Microsoft shouldn’t pay a dime over what is due Yahoo shareholders in the original offer. It is full and fair, and potentially even more so given the uncertain economic environment. They will likely scare Yahoo to the table and prompt Microsoft to offer $1-$2 a share more just to keep the peace and get the deal done.

But Yahoo shareholders don’t deserve it, as I am thoroughly convinced that the Yahoo board was completely outmaneuvered from the get go. Nothing would please me more to see Microsoft launch not a proxy contest, but a tender offer, and to take their offer directly to shareholders. Because you know what? There is no better deal in town, not by a long shot. Yahoo is toast. And Microsoft is their new daddy. And the longer the Yahoo board plays games, the more strident and threatening their increasingly irate shareholders will become.

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COMMENT:

AUTHOR: Wayne Mulligan

EMAIL: wayne@tickerhound.com

URL: http://blog.tickerhound.com

DATE: 04/07/2008 01:11:13 PM

Quote of the day:  ”Microsoft has been holding a straight flush from Day 1, but have acted as if they’ve got ace high” —- classic!

I think MSFT caught a bit of the “hippie” bug as they ventured into the Bay Area to try and buy the (former) crown jewel.  It’s a new day and while I’m all for not wanting to rock a big boat too hard, Microsoft needs to drag Yahoo! into the street and smack the company around a bit.

-W

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