Yahoo Ignores Deadline, So It's Microsoft's Move

Richard Koman, newsfactor.com Mon Apr 28, 12:57 PM ET

Yahoo ignored Microsoft's deadline to respond to its $44.6 billion takeover offer by Saturday, leaving the next move in this chess game to Microsoft CEO Steve Ballmer. Microsoft has a number of options, but none of them are particularly appealing and investors are impatient with the lack of progress.

Typical was a comment reported by Bloomberg last week: "They need to quit fooling around and get the deal done," said Ken Smith, director of technology investment at Munder Capital Management.

Last week, speaking to business executives in Madrid, Ballmer dropped numerous hints that most analysts viewed as posturing. At one point he said that if a deal with Yahoo failed to materialize, "we go forward alone" by trying to compete directly with Google in online advertising.

Just Bluster?

But he also emphasized that Microsoft is not interested in sweetening the pot. In the same speech he called Microsoft's offer "quite generous" and hinted that a hostile takeover was in the works. "By this point if they don't agree, we would have to take our arguments directly to the shareholders," Ballmer said. "We will see what they do, and we will move appropriately at that point."

Financial analysts viewed much of this talk as posturing. The consensus among analysts is that Microsoft needs Yahoo to quickly build a business that can compete with Google. "Microsoft does need Yahoo," Sachin Shah, a merger-arbitrage analyst for ICAP Securities, told Bloomberg Television. "If they didn't, they would have walked away a long time ago."

If Microsoft is truly committed to acquiring Yahoo, it basically has three strategies: raise the price, launch a hostile takeover bid, or take a breather and hope Yahoo continues to flounder over the summer.

Proxy Fight Likely

Tim Bajarin, principal analyst with Creative Strategies, expects Microsoft to go hostile. "Microsoft needs Yahoo, so I think their next step will be to take the fight to the shareholders," Bajarin said. "Given the economic conditions, they could wait for Yahoo to stumble over the summer, which could make the current bid seem like a good offer. But Microsoft needs to start moving forward with or without Yahoo, so my guess is that they launch a proxy fight."

In a proxy fight, a hostile bidder presents its slate of candidates for election to the board. Shareholders make a choice on which direction management should take by re-electing the current board or the suitor's board. Another option is to make a "tender offer" directly to shareholders.

The problem with these options is that they are expensive and the outcome is uncertain. So Microsoft would certainly prefer a friendly merger.

That's what Heather Bellini, analyst at UBS AG, thinks will happen. "Even if Microsoft tried to lower the value of the deal or walk away, we would expect them to eventually come back and raise it in order to consummate the transaction in a friendly manner," she said.