Bloomberg: Yahoo Defense May Fail to Repel Hostile Microsoft Bid

By Amy Thomson

Feb. 12 (Bloomberg) -- Yahoo! Inc., the Internet company that rejected a $44.6 billion bid from Microsoft Corp., may find that a so-called poison pill in its bylaws isn't enough to defend against a hostile takeover.

The provision is designed to increase the number of shares outstanding in the event of an unwanted offer, making a takeover costly. Microsoft, the biggest software maker, would be able to get rid of the clause by replacing Yahoo's 10 directors, who are all up for re-election at the next annual meeting. The last meeting was in June.

Microsoft has until March 14 to nominate its own board members and clear the way to unite the second- and third-biggest Internet search companies. Yahoo shares slid 50 percent in the two years before the Feb. 1 offer, and some shareholders and analysts say the company should sell.

``Ultimately, it's almost impossible to resist a strong acquirer with a strong offer,'' said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware in Newark, Delaware.

The $31-a-share bid from Redmond, Washington-based Microsoft is 62 percent more than Yahoo's closing price the day before the offer. Yesterday, Yahoo's board said the bid ``substantially undervalues'' the Sunnyvale, California-based company.

Microsoft said in a statement that it's ``moving forward'' with the proposal and may take the bid straight to shareholders. Yahoo declined to comment beyond its statement yesterday, said spokeswoman Tracy Schmaler.

Odds on Deal

There's a 55 percent chance Microsoft will complete a takeover at a higher price, Mark Mahaney, a San Francisco-based Citigroup analyst, said today in a report. Susquehanna International Group LLP's Marianne Wolk in New York pegs the probability of a Microsoft purchase at 75 percent.

Microsoft would need Yahoo shareholders to support its slate in a vote at the annual meeting. Investors probably would back Microsoft's nominees if Yahoo attempted to trigger the poison pill, said Nancy Havens, president of hedge fund Havens Advisors. Her New York firm owns Yahoo shares and sells Microsoft short.

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

Microsoft may raise the offer to accelerate the takeover, said Heather Bellini, a UBS AG analyst in New York.

Microsoft rose 13 cents to $28.34 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has dropped 13 percent since the company announced the offer. Yahoo fell 30 cents to $29.57.

Competition

Microsoft is pursuing Yahoo to compete with Google Inc., the leader in Internet search. Google has grown faster than Yahoo or Microsoft in every quarter since the start of 2005. Yahoo has posted eight straight quarters of profit declines, with the latest leading to an 8.5 percent drop in the stock on Jan. 30.

``It's a company that's floundering,'' T. Rowe Price fund manager Larry Puglia, who oversees $12.8 billion in the group's Blue Chip Growth Fund, said in a Feb. 8 interview. His fund, which owns Microsoft and Yahoo, favors a deal at a higher price.

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

The Wayne County Employees' Retirement System of Michigan, owner of about 13,600 Yahoo shares, yesterday sued Yahoo over the bid rejection. In a complaint filed in Delaware Chancery Court, the group asked a judge to force Yahoo to consider takeover offers.

Flooded Market

Yahoo's poison-pill provision, adopted in March 2001, lets investors buy new shares at half price if a party acquires more than 15 percent of the stock without board approval. That would flood the market with shares, increasing the price Microsoft would have to pay to get them all.

The poison pill would give shareholders the right to buy preferred shares for $250 each. Those units could then be exchanged for $500 worth of common stock. The company also has the authority to issue up to 10 million shares of preferred stock at any price, according to the provision.

Yahoo shares plummeted 94 percent from a high of $118.75 on Jan. 3, 2000, to a low of $6.78, the day after the company announced the clause. Some analysts at the time said Yahoo might attract a bid after an economic slowdown hurt Internet advertising sales and pushed the stock price down.

The company probably will decide against activating the clause to avoid angering shareholders, said hedge fund president Havens.

``Their whole goal right now is to get an increased price,'' she said. ``They're between a rock and a hard place.''

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