Yahoo facing shareholder fireworks at annual meeting
SAN FRANCISCO (AP) - May 6, 2008 The first signs of outrage flared Monday as Yahoo's stock
plunged 15 percent in reaction to Microsoft withdrawal of its
sweetened $33-per-share bid and two lawyers already suing the
company's board vowed to amend their complaint to account for a
"massive loss in shareholder value."
The breaking point in the 3-month standoff occurred over the
weekend when Yahoo co-founders Jerry Yang and David Filo met with
Microsoft Chief Executive Steve Ballmer after he had agreed to
raise the software maker's bid by about $5 billion, or more than $3
per share. Yang and Filo said Yahoo's board wanted $37 per share -
a price the company's stock hasn't reached in more than two years.
In response, Ballmer pulled his offer off the table.
In an interview Monday, Yang indicated he had expected Ballmer
to counter.
"We engaged with them and we wanted to find a way to get
something done. But they walked," said Yang, who was named as
Yahoo's chief executive officer 11 months ago.
If he wants to remain CEO, Yang probably will have to show his
turnaround strategy is compelling enough to propel Yahoo's stock
beyond $33 per share within a year.
Yang has promised that a more sophisticated and far-flung ad
network will accelerate Yahoo's net revenue growth by at least 25
percent in 2009 and 2010, up from the recent pace of 12 percent
increase.
"The company is doing better than three months ago," Yang said
Monday. "I think in many ways this (takeover threat) has been good
for us. We still have a lot of work to do to demonstrate that we
can be successful, and I am focused on that."
But Yang's credibility has been undermined by Yahoo's repeated
forecasts of better times ahead while its profits steadily eroded
during the past two years.
"We are not willing to give (Yahoo) the benefit of the doubt
that they can make meaningful improvement over the next three
years," UBS analysts Benjamin Schachter, Heather Bellini and Abhey
Lamba wrote in a joint research note.
If Yahoo stumbles, that could entice Microsoft to return with
another takeover bid that would be more difficult to turn down.
Venture capitalist Todd Dagres of Spark Capital likened this
approach to a crocodile's.
"Rather than try to eat its prey while it's warm and tough,
(Microsoft is) dragging it down to the bottom of the river,
sticking it under a rock and eating it later when it's cold and
soft," he said.
Although Microsoft has publicly indicated it will focus on
measures besides buying Yahoo in its effort to make its Internet
division profitable, several analysts predicted the software maker
will revive its offer in the summer or fall if Yahoo doesn't snap
out of its two-year funk - the weakness that exposed it to an
unwanted takeover in the first place.
"Should the frustration of (Yahoo) shareholders come to a boil,
we believe (Microsoft) could re-enter the picture, essentially
playing the role of the white knight," analyst David Hilal of
Friedman, Billings, Ramsey & Co. wrote in a Monday research note.
With similar opinions reverberating through the stock market,
Yahoo's stock didn't sink as dramatically as many analysts
anticipated. But Yahoo shares shed $4.30 to close at $24.37, wiping
out nearly half the gain they had made since Microsoft made its bid
Jan. 31. The drop left the Sunnyvale-based company's market value
about $12.5 billion below Microsoft's last offer.
Yahoo's stock price was $19.18 before Microsoft made its offer.
"I was expecting to see a more extreme reaction" to
Microsoft's withdrawn bid, Stanford Group analyst Clayton Moran
said. "Microsoft is trying to make it seem like it's not coming
back (with another bid), but this somewhat muted reaction shows the
market isn't buying it."
If Microsoft returned with a "real offer and a real proposal,"
Yang said, "we would be happy to listen."
Yang figures to get an earful from irate shareholders at the
annual meeting. Yahoo finally set the meeting for July 3 after
indefinitely postponing it in early spring as part of its effort to
foil a possible hostile takeover attempt by Microsoft.
Now it may be Yahoo's shareholders who try to oust Yang and the
rest of Yahoo's board instead of Ballmer, who had threatened an
attempt to dump the 10 directors if they didn't accept Microsoft's
offer.
Lawyers for two Detroit-based public pension funds that sued
Yahoo in February, alleging it failed in its duty to act in
shareholders' best interests, will amend their complaint to include
the weekend's events, according to a statement Monday from the
firm, Bernstein Litowitz Berger & Grossmann.
Meanwhile, Google Inc., whose dominance in online search
triggered Microsoft's bid, appears poised to grow even stronger.
Unnerved by the prospect of its two biggest rivals joining
forces, Google reached out to Yahoo to help thwart Microsoft's bid.
The collaboration has prompted Yahoo to consider turning over
some of its advertising space to Internet search leader Google,
whose technology yields higher profits from commercial links. If
Yahoo announces an ad partnership with Google, that could preclude
a renewed bid from Microsoft because Ballmer thinks the alliance
will diminish Yahoo's long-term value.
Many analysts share Ballmer's opinion. While Google could boost
Yahoo revenue by anywhere from $850 million to $1.6 billion
annually, it might also hurt Yahoo by undercutting the appeal of
its own ad platform.
An alliance between Google and Yahoo also would cause regulatory
headaches because antitrust officials would to take a hard look at
the partnership because the companies combined control more than 80
percent of the Internet's search advertising market.
While analysts debated how Yahoo and Microsoft should proceed,
most agreed Google will benefit from the aborted takeover attempt.
Even if Google doesn't end up selling ads on Yahoo's heavily
trafficked Web site, it has kept some of the Internet's biggest
services out of Microsoft's clutches.
"We believe Google is a major winner given the failure of the
Yahoo bid," Stifel Nicolaus analyst George Askew wrote in a Monday
note. "Google is well positioned to continue to gain market share,
benefit from any Yahoo (advertising) deal, and exploit any ongoing
chaos at Yahoo and Microsoft."
Google shares gained $13.61, or 2.3 percent, to close at $594.90
Monday.
Time Warner Inc. also appears to be in a better negotiating
position if it decides to sell its struggling AOL subsidiary, as
many analysts anticipate.
Yahoo had been mulling a possible combination with AOL's online
operations as a defensive measure against Microsoft. Now, Microsoft
may make a run at AOL if it's interest in buying Yahoo is truly
dead. And if Microsoft enters the picture, Google might offer to
increase its 5 percent stake in AOL just to repel Microsoft.
A long list of Internet startups also could be in line for big
windfalls if Microsoft and Yahoo step up their efforts to acquire
more online weapons to challenge Google. And if Microsoft and Yahoo
go shopping, Google has plenty of cash to get into bidding wars for
potential takeover targets like Digg Inc., LinkedIn Corp. and
Facebook Inc.
"Freed of one another, Yahoo and Microsoft are buyout
prospectors: we would expect a rush-to-deal environment," BMO
Capital Markets analyst Leland Westerfield.
Most analysts believe Microsoft has to make some kind of bold
move after its online division lost $745 million through the first
nine months of the company's fiscal year.
"Any notion of simply returning to the original, pre-Yahoo
strategy is likely to be insufficiently defined and credible,"
Bernstein Research analyst Charles Di Bona wrote in a Monday note.
In a mild surprise, Microsoft shares fell 16 cents to $29.08
Monday. Most analysts thought the stock would climb because
investors had driven down the shares during the last three months
on worries that a Yahoo takeover would turn into an expensive mess.