Sunday, July 13, 2008

Reuters: Did Yahoo finally do something right?

Sun Jul 13, 2008 9:38pm EDT

SAN FRANCISCO (Reuters) - After six months of flip-flop deal talks that drew mostly anger and disappointment from Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz) shareholders, the Internet company may finally have done something right.

Yahoo on Saturday rejected what it called a 24-hour "take it or leave it" joint proposal from Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) and activist shareholder Carl Icahn, which involved selling Yahoo's search business to the software maker and handing over the rest of the company to Icahn's slate of board nominees to run.

Most shareholders of Yahoo want Microsoft to buy the company outright, preferably for around $33 a share, and appear to show little interest in any partial transaction that involves only Yahoo's search advertising business.

"Our position is we prefer that Microsoft reenter negotiations to buy the entire company," said Robert Hagstrom, a portfolio manager at Legg Mason Capital Management, which is Yahoo's second-largest shareholder.

"We have made no decision on Icahn because we have no information about how he would run the company if Microsoft does not buy Yahoo. Furthermore, the latest developments to sell Yahoo search to Microsoft is unappealing," he told Reuters by e-mail.

Investors now only have Yahoo's version of events. Microsoft and Icahn, which owns nearly 5 percent of Yahoo, have not publicly commented on their proposal so far.

According to Yahoo, the non-negotiable offer required the immediate removal of the current board and top management. It came ahead of a critical August 1 annual meeting, where Icahn is seeking to replace Yahoo's board and oust chief executive Jerry Yang.

Yahoo Chairman Roy Bostock said the offer was not in the best interests of Yahoo's stockholders because the terms were inferior to the company's current business prospects, including its search advertising partnership with Google Inc. (GOOG.O: Quote, Profile, Research, Stock Buzz)

Even Eric Jackson, a minority Yahoo shareholder and vocal critic of Yang during the last six months of on-again, off-again Microsoft talks, said the board did the right thing.

"Shareholders have always preferred a straight acquisition. Yahoo is smart to turn it down," said Jackson, who leads a group of dissident investors with about 3 million Yahoo shares. "As long as Microsoft only wants to do a search deal, Yahoo comes out looking stronger (by rejecting partial deals)."


Sources familiar with the matter said the latest proposal includes $2.3 billion in guaranteed annual search ad revenue for five years, with the option to extend for another five.

Yahoo had previously said it saw an $800 million annual revenue opportunity in its Google deal, which was non-exclusive meaning Yahoo could still sell search ads using its own technology or partner up with other companies.

But however the numbers stack up, what is clear is that Yahoo has now offered to sell itself to Microsoft for $33 per share, or $47.5 billion total, but Microsoft has refused, according to Yahoo.
Analysts said Microsoft and Icahn must be careful not to appear too much the bully or they risk investor sentiment turning in favor of Yahoo. When Microsoft pushed too hard earlier this year, it resulted in Yahoo signing the search advertising deal with Google.

"There's a certain degree of sentiment that's moving toward Yahoo," said Canaccord Adams analyst Colin Gillis. "Investors want to see a price per share Microsoft is willing to pay to buy Yahoo. If there is no price, say that definitely."

Microsoft has previously said it no longer wants to negotiate with Yang's team, but that it is willing to resume talks if a new board is elected on August 1.

Sandeep Aggarwal, an Internet analyst with Collins Stewart, said the 24-hour deadline marked an increasingly hostile tone that the standoff is taking.

Microsoft also faces pressure to show progress with its Internet strategy ahead of its July 24 annual meeting with Wall Street analysts, Aggarwal said. Growth in Microsoft's core business is moderating and the company needs to show it is gaining the upper hand in its Internet strategy by making progress striking a deal with Yahoo, he said.

"This appears to be one of the last friendly attempts Microsoft will make before letting shareholders decide at Yahoo's annual meeting," he said. "The war will heat up from here."

(Reporting by Anupreeta Das and Eric Auchard in San Francisco, Muralikumar Anantharaman in Boston and Sinead Carew in New York, writing by Tiffany Wu; Editing by Toni Reinhold)

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