TheDeal.com: Few escape hatches for Yahoo!

by David Shabelman
[Posted on February 4, 2008 - 5:33 PM]

Yahoo! Inc. might need the M&A equivalent of the desperation heave by New York Giants quarterback Eli Manning to David Tyree in Sunday's Superbowl to escape Microsoft Corp.'s $44.6 billion blitz of the Internet company.

"In these hostile deals it's not that the deal is not going to happen, but at what price it's going to happen," said Tom Taulli, founder of DealProfiles.com, an online service that tracks mergers and acquisitions. "I don't think Yahoo! can stop it. Their best case right now is if it gets hung up in the netherworld of antitrust."

Hoping to do just that, Google Inc. on Sunday expressed concerns that a Microsoft-Yahoo! merger threatens the openness of the Internet and raises competition concerns. Google executives also are reportedly consulting with Yahoo! leaders on possible ways to thwart the deal. That could include a partnership between the two companies under which Yahoo! would outsource its search services to Mountain View, Calif.-based Google, the industry leader in that domain.

But Ashkan Karbasfrooshan, a Yahoo! shareholder who blogs about technology companies at WatchMojo.com, said Microsoft's standing offer means the time for Yahoo! to strike up a partnership with Google has passed. "Even if it adds $1 billion or $2 billion in revenues to Yahoo! it also strengthens Google," he said. "So if I'm an investor I'd want to invest in Google, not Yahoo!"Talks of such an arrangement with Google could help Yahoo! in trying to negotiate a richer offer from Microsoft.

In a research note, Merrill Lynch & Co. analyst Justin Post said Monday that Yahoo! should use the potential partnership "as leverage for a higher offer from Microsoft."

Taulli said that during the 1980s companies at risk of a hostile takeover often adopted a "scorched earth policy" by selling their most prized asset or taking on debt in order to make the company unattractive to the buyer. More recently, PeopleSoft Inc. was able to delay an unsolicited bid from software rival Oracle Corp. before succumbing in 2005 by waging an aggressive public relations campaign amid antitrust concerns with the deal.

But such options may not be available to Yahoo!, with many of its shareholders keen to capitalize on Microsoft's $31 per share bid and most experts downplaying the deal's antitrust risks.

"If they don't do a deal, their stock price is going to collapse, and I don't think the board wants to be susceptible to shareholder lawsuits," Taulli said.

Morton Pierce, chairman of Dewey & LeBoeuf LLP's mergers and acquisitions group, said that even with a poison pill and other takeover defenses in place and barring any "white knight" bids, Yahoo! will struggle to deter Microsoft from completing the deal. "It really comes down to a question of money, and if you put this much of a premium in the opening bid, it puts a lot of pressure on board members," he said. "Basically, you have to convince someone you can do better than taking this price today and get a better return on their investment, and that's going to be difficult."

Eric Jackson, who last year led a small group of Yahoo! investors in pressing for the resignation of Yahoo!'s then-CEO Terry Semel, said other shareholders he has spoken with were relieved to hear of the offer from Redmond, Wash.-based Microsoft, and he expects investors to push Yahoo! to accept the deal.

"It doesn't surprise me that they're trying to do everything they can to find some other kind of solution," Jackson said. "But now that the horse is out of the barn, Yahoo!'s in an untenable position if it says to its shareholders that staying independent is better than an acquisition by Microsoft. I don't see how a shareholder is going to see outsourcing paid search to Google or anything else they come up with as more attractive than taking the money."

Meanwhile, finding another suitor to outbid Microsoft also would be a tall order. In a research note, Stifel Nicolaus & Co. analyst George Askew, examining the possibility of private equity firm buying Yahoo!, concluded that "the numbers just don't work" to support such a transaction. The financing and operational risks are "too high" for such a deal, while Yahoo! does not generate adquate cash flows to warrant taking on so much debt, he said."

Microsoft would likely top any competing bids with its own deep pockets and synergies," Askew said.

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