Breakout Performance: Bloomberg: Microsoft `Moving Forward' With Yahoo Takeover Offer

By Dina Bass

Feb. 11 (Bloomberg) -- Microsoft Corp., spurned today in its offer to buy Yahoo! Inc. for $44.6 billion, is ``moving forward'' with the proposal and may take the bid straight to shareholders.

``It is unfortunate that Yahoo has not embraced our full and fair proposal to combine our companies,'' Microsoft said in a statement today, without giving a specific plan. ``We are confident that moving forward promptly to consummate a transaction is in the best interests of all parties.''

Microsoft, wary of alienating its own shareholders by raising the price too high, may initiate a hostile takeover and court Yahoo investors that are willing to press the company's board, said Pacific Crest Securities' Brendan Barnicle. Microsoft Chief Executive Officer Steve Ballmer may be signaling confidence that Yahoo has no other way to boost its stock, he said.

``It doesn't seem like Yahoo's other options are good,'' said Barnicle, a Portland, Oregon-based analyst. ``If there was a white knight, we'd have seen it by now.''

Some Microsoft shareholders wanted the company to hold firm on the offer, which is 62 percent more than Yahoo's stock price the day before the bid became public.

``If Yahoo is intractable and won't listen at this price, Microsoft has to be intractable too,'' said Ken Allen, an analyst at Baltimore-based T. Rowe Price Associates Inc., the fifth- largest institutional holder of Microsoft shares.

Yahoo rose 67 cents to $29.87 at 4 p.m. New York time in Nasdaq Stock Market trading. Microsoft shares fell 35 cents to $28.21.

Hostile Pursuit?

Microsoft reiterated that it might rely on hostile measures, saying it ``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.'' Company spokesman Frank Shaw declined to comment on specific tactics.

Unless Yahoo CEO Jerry Yang has a plan to boost his company's shares above the offer price, Yahoo investors will side with Ballmer, said Michael Gartenberg at JupiterResearch.

``He essentially said, `We can do this the easy way or the hard way,''' said Gartenberg, a New York-based analyst. ``If Yahoo has no credible plan, it's hard to see how shareholders are going to say to Jerry, `It's your company and we'd love to find a way to keep it as a stand-alone entity.' I don't think that's a real priority for Yahoo shareholders.''

Microsoft sent its offer to the Yahoo board less than a day before making the bid public Feb. 1. While the offer was pegged at $31 a share, the value of the half-cash, half-stock deal has fallen to about $28.91, based on Microsoft's stock close today.

New Board?

Microsoft has never before made an unsolicited offer, let alone attempted a hostile takeover. A person familiar with the matter said last week that the Redmond, Washington-based software maker may seek to oust Yahoo directors if they reject its bid.

By combining with Microsoft, Sunnyvale, California-based Yahoo would become a closer No. 2 behind Google Inc. in Internet advertising revenue and Web search queries.

In failing to raise the price now, Microsoft is betting that Yahoo shares will sink, making Ballmer's argument for him, according Pacific Crest's Barnicle.

``If it appears to shareholders that Microsoft might very well go away, the stock may do a bit of a swan dive here, and that enables Microsoft to come back in at the same price or a higher price,'' said Frederick Lane, the former co-head of mergers and acquisitions at Donaldson, Lufkin & Jenrette. He now runs Lane Berry & Co., a Boston investment banking boutique.

Strange Allies

Yahoo's shareholders, on the other hand, may provide a useful ally for Ballmer. The company's stock had lost half its value in the two years before the offer.

Eric Jackson, president of the investment firm Ironfire Capital in Naples, Florida, is organizing shareholders to support the Microsoft bid or any higher offer, according to a posting on his blog yesterday. He said there are 2.1 million shares in support of the move, though the count is based on an ``informal pledge'' by investors.

Eight months into Yang's tenure as CEO, he's failed to offer a plan to catch Google or reverse the stock declines, Gartenberg said. With no other bidders for Yahoo emerging so far, Ballmer's proposal may be the best choice available to Yahoo investors.

``The letter Ballmer wrote basically said, `Dear shareholders of Yahoo, would you like some of your money back? I'm prepared to give you that. Love, Steve,''' Gartenberg said. ``It's hard to see how this deal doesn't get done.''