Report: Microsoft considering higher Yahoo bid

April 30, 2008 6:27:01 PM PDT
Microsoft Corp.'s directors met Wednesday to consider raising the software maker's $41.9 billion bid for Yahoo Inc. instead of pursuing a hostile takeover attempt, according to a published report. The board emerged from the meeting without reaching a decision, The Wall Street Journal reported, citing unnamed people familiar with the matter.

The boardroom intrigue heightens the suspense hanging over Microsoft's bid since Yahoo let pass an April 26 deadline for accepting the offer. Microsoft has indicated it will reveal its response to Yahoo's latest snub before the end of the week.

Microsoft Chief Executive Steve Ballmer had threatened to oust Yahoo's 10-member board - including Yahoo co-founder and CEO Jerry Yang - if it didn't relent and agree to a sale.

But Ballmer apparently is having second thoughts about attempting a coup, which likely would involve several months of animosity and distraction, with no assurance of victory.

Contradicting Ballmer's recent public statements, Microsoft privately has indicated it might be willing to boost its offer to as much as $33 per share, up from the bid's initial value of $31 per share, the Journal reported Wednesday.

Microsoft also is weighing withdrawing its bid - a move likely to cause a precipitous drop in Yahoo's stock, which has been bolstered by the 3-month-old takeover bid.

Yahoo shares gained five cents Wednesday to finish at $27.41. Before Microsoft announced its unsolicited bid in February, Yahoo's stock price stood at $19.18, near its four-year low.

If Yahoo's stock deteriorated during the next few months, Microsoft could return with another bid that would be more difficult to turn down.

Microsoft hadn't responded to requests for comment as of late Wednesday.

Microsoft's lengthy internal debate over how to proceed illustrates the tremendous stakes underlying a deal that could reshape the Web for millions of consumers and thousands of advertisers.

A Yahoo takeover also would represent by far largest acquisition in Microsoft's 33-year history.

Yahoo's board maintains the Sunnyvale-based company is worth substantially more than Microsoft's initial bid of $44.6 billion, or $31 per share. The value of the cash-and-stock offer had declined to $29.06 per share Wednesday, reflecting a downturn in Microsoft shares since the saga began.

Even a sweetened offer of $33 per share might not be enough to wrap up a friendly deal because some of Yahoo's major shareholders have signaled they want at least $35 per share, or about $50 billion.

Ballmer and Bear Stearns CEO Alan Schwartz, a Microsoft adviser, have been lobbying Yahoo shareholders to rally support for a lower price, the Journal said.

Most analysts have been predicting for weeks that Microsoft could raise its offer as high as $35 per share. Microsoft, though, has insisted there is little reason to up the ante, given Yahoo's recent financial malaise and the absence of competing bids.

Microsoft also may be trying to hold down the price because it plans to spend a substantial sum on incentives aimed at retaining Yahoo's top executives, engineers and other key employees if it the proposed marriage goes through.

The software maker has earmarked about $1.5 billion - the equivalent of nearly $1 per Yahoo share - for retention packages, according to details that emerged in a court hearing held in a shareholder suit filed against Yahoo for rejecting the Microsoft bid.

A transcript of the March hearing quotes a Yahoo lawyer telling a Delaware judge that minutes from a Feb. 8 Yahoo board meeting reveal Microsoft had stated its intention to make the retention payments.

Yahoo's directors haven't specified an acceptable sales price, but some analysts believe they may want close to $40 per share - a price that Microsoft indicated it was willing to pay when the two sides held private discussions in early 2007.

But Yahoo's earnings have sagged since then as the company lost ground to rival Google Inc. as they compete for Internet advertising sales.

Yahoo still holds two trump cards that could thwart a Microsoft takeover.

It has tested a potential advertising partnership with Google that could lead to a long-term alliance if it can win regulatory approval. And it has explored merging with the online operations of Time Warner Inc.'s AOL.

If Microsoft scraps the Yahoo offer, it will intensify the pressure on Ballmer to prove he can come with another plan to mount a more formidable challenge to Google - the main reason Microsoft wanted buy to Yahoo.

Despite years of investment, Microsoft's online operations are still struggling. The division lost $745 million on $2.4 billion in revenue through the first nine months of the company's current fiscal year. In contrast, Google made $1.3 billion on $5.2 billion in revenue in just the first three months of this year.

Some analysts think Ballmer would be better off using the money he planned to spend on Yahoo to buy a basket of more nimble Internet startups that have been building loyal audiences and could help drum up more online advertising.