Yahoo tries to delay Microsoft showdown

March 6, 2008 8:27:57 AM PST
Slumping Internet pioneer Yahoo Inc. on Wednesday postponed a key deadline in a looming battle with spurned suitor Microsoft Corp., hoping to gain more wiggle room as it tries to escape a takeover. The Sunnyvale-based company's maneuver means that March 14 is no longer the deadline for Microsoft to nominate a slate of candidates to replace Yahoo's current board - the 10 directors who rejected the world's largest software maker's initial takeover offer of $44.6 billion.

Microsoft had already signaled it was prepared to oust the board if Yahoo didn't come to the negotiating table before March 14.

Yahoo hasn't offered a new nominating deadline. It will be set once Yahoo announces the date of its annual shareholders meeting. Microsoft will have up to 10 days after the public notice to nominate directors and begin what's known as a "proxy" battle.

"Our objective here is to enable our board to continue to explore all of its strategic alternatives for maximizing value for stockholders without the distraction of a proxy contest," Yahoo Chief Executive Jerry Yang and Chairman Roy Bostock wrote in an e-mail sent to the company's employees.

Microsoft didn't immediately respond to requests for comment. Yahoo could wait a few more months before announcing its annual meeting, which can be held as late as July 12 this year. But Yahoo is more likely to set the date within the next week or two, according to a person familiar with the company's thinking. The person wasn't authorized to speak publicly.

"We believe we are making progress clarifying the many options available to us," Yang and Bostock wrote. "... Management and the board are both speaking with - and listening carefully to - our stockholders. This ongoing dialogue has provided us with helpful feedback."

Other options Yahoo is considering include possible alliances with Time Warner Inc.'s AOL and News Corp.'s, according to the person knowledgeable about the about the negotiations.

The decision to delay the date for nominating alternate directors shouldn't be interpreted as a sign that Yahoo is confident the potential deals with AOL or will trump Microsoft's bid, this person said.

Most analysts still expect Microsoft to wind up buying Yahoo, possibly by raising its initial bid of $31 per share.

Microsoft has insisted its current offer is fair, but analysts believe the Redmond, Wash.-based company might be willing to up the ante to $34 or $35 per share to avoid a showdown that could alienate many of the Yahoo employees whose cooperation will be needed to make the proposed marriage pay off.

"Yahoo becoming part of Microsoft is inevitable," Gartner Inc. analyst Allen Weiner said. "I believe they are on an edge of a cliff and there is no turning back."

Without providing specifics, Yahoo contends it's worth more than $45 billion despite a two-year streak of declining profits that hammered the company's stock. When it was announced Feb. 1, Microsoft's initial bid was 62 percent above Yahoo's market value.

The offer's value has since dropped because half the payment would be made in Microsoft stock, which has fallen 14 percent.

Microsoft's shares rose 53 cents to close at $28.12 Wednesday. That left the value of its offer at roughly $40 billion, or $28.87 per share. Yahoo shares gained 61 cents to close at $28.67.

If the Microsoft bid weren't still on the table, Yahoo's stock price probably would plunge well below $20.

Besides being dragged down by the company's own slump, Yahoo's stock also could be hurt by intensifying concerns about how well the online advertising market will fare in the lackluster U.S. economy.

The economic worries have contributed to a 21 percent decline in Internet search and advertising leader Google Inc.'s stock price since Microsoft pounced on Yahoo. If investors punished Yahoo similarly, its stock price might plummet to $15.

Yahoo is trying to work out possible combinations with either AOL or to boost the value of its franchise. The company also considered hiring Google to sell ads on Yahoo's heavily trafficked Web site, but regulatory issues have complicated those talks.

An alliance with looked like Yahoo's most likely escape route a couple weeks ago, but negotiations have recently heated up with Time Warner about a possible combination with AOL, according to the person familiar with the talks.

But AOL's popularity has been waning for years, making a combination with Yahoo significantly less compelling than it would have been a decade ago, Weiner said.

About 69 percent of Yahoo's stock is owned by shareholders with stakes in Microsoft, too, according to a research note published Wednesday by UBS analyst Benjamin Schachter. After concluding most of the shareholders with dual stakes in the two companies would support a higher Microsoft bid, Schachter predicted Yahoo will be sold for $34 per share.