Microsoft/Yahoo Deal: It's Time to Get Serious, Steve

I'm surprised it took this long. But finally Steve Ballmer and the Microsoft (MSFT) board appear to be getting serious about their offer for Yahoo (YHOO). From the Wall Street Journal:

Microsoft Corp. Chief Executive Steven A. Ballmer threatened Yahoo Inc. directors with a hostile takeover of the company if they don't reverse course and agree to a deal within the next three weeks.

In a letter delivered on Saturday, Mr. Ballmer lamented Yahoo's unwillingness to negotiate a deal, saying "that by choosing not to enter into substantive negotiations with us, you have failed to give due consideration to a transaction that has tremendous benefits for Yahoo!'s shareholders and employees."

If the board doesn't begin talks within three weeks, Microsoft would be "compelled" to take its offer directly to shareholders and wage a proxy fight to replace Yahoo's directors, Mr. Ballmer wrote. He also implied that the offer Microsoft would make after the deadline would be lower than the one now on the table.

********************

In his letter, Mr. Ballmer suggests that worsening economic conditions have reduced Yahoo's market value, adding that "by any fair measure, the large premium we offered in January is even more significant today." Microsoft's original $31 per share offer represented a 62% premium to where Yahoo's shares had been trading before the offer.

Many Yahoo shareholders have been holding out for a higher offer and it is unlikely they would embrace a deal for less than the original one. Still, Mr. Ballmer's threat underscores the frustration on the part of the software maker with the lack of any progress.

I've been barking up this tree since the offer was first announced. I've also been mystified as to why Microsoft didn't take a firmer stand earlier on. As far as I'm concerned, the idea that tough tactics don't work in technology mergers is a bunch of malarkey. As long as you embrace the key people and gain control of valuable products and technology, you can get as hostile in technology as you can in any other industry and preserve value (assuming the deal makes sense, which they seldom do).

Larry Ellison doesn't make it his practice to be all huggy-kissy in technology M&A deals, and it has worked for him. This is because he has a crack integration planning and execution team and only buys stuff that fits in well with his existing product portfolio.

From a strategic perspective, here is what I recommended Microsoft do back in February:

If for no other reason than to show how shoddy governance practices and weak shareholder advocacy will not stand, Microsoft should stand firm to its current $31 offer and ram it through with the help of a good proxy solicitor and a world-class PR campaign (one that is better than that for many of its products, hopefully).

It will be a boon to shareholder rights' advocates everywhere. They have put a fair offer on the table. No other competing transaction comes close (Yahoo and News Corp. - give me a break). The "just say no" defense doesn't work here because of countless and persistent management miscues and no plan. If Microsoft goes away, Yahoo stock will plummet like a stone, causing lawsuits to come out of the woodwork like you would not believe. Get it done, Steve. Take no prisoners. This is what you're good at. Like your other Pacific Northwest friends, Just Do It.

Yahoo's lame tactics have only been outshone by Microsoft's inexplicable passivity. Microsoft has been holding a straight flush from Day 1, but have acted as if they've got ace high. But even the sleeping giant can be awakened, and it was when they rolled over, looked at the calendar and realized that Yahoo has been giving them the Heisman for two months now.

As I said from the beginning, Microsoft shouldn't pay a dime over what is due Yahoo shareholders in the original offer. It is full and fair, and potentially even more so given the uncertain economic environment. They will likely scare Yahoo to the table and prompt Microsoft to offer $1-$2 a share more just to keep the peace and get the deal done.

But Yahoo shareholders don't deserve it, as I am thoroughly convinced that the Yahoo board was completely outmaneuvered from the get go. Nothing would please me more to see Microsoft launch not a proxy contest, but a tender offer, and to take their offer directly to shareholders. Because you know what? There is no better deal in town, not by a long shot.

Yahoo is toast. And Microsoft is their new daddy. The longer the Yahoo board plays games, the more strident and threatening their increasingly irate shareholders will become.

Comments

[Manmohanj]

Why does not Steve pay decent dividend to its shareholders instead? It will also help with the banking crisis. In any case, they will make a royal mess if they acquire Yahoo w/o adding any value...adding to the general wealth destruction.

[sanibel]

I fail to see why investors cannot get rid of Steve Ballmer. Microsoft is customarily the last to engage in innovation and it seems to have to copy or steal from other companies to catch up. If Microsoft was properly run, it would need to buy Yahoo.

[sanibel]

Sorry, but I meant to say: If Microsoft was properly run, it would NOT need to buy Yahoo.

I don't see an edit function for posts.

[InformationArbitrage]

I wholly agree that this deal is stupid from MSFT's perspective. But there are two issues at hand: (1) whether the deal makes sense (it does not); and (2) how to execute the deal, regardless of its stupidity. I have clearly posted on 1 (the ill-logic of the deal), and 2 (that MSFT should stick to their guns and announce a tender offer, and, in fact, should have done this after YHOO's initial reluctance to negotiate). But yes, MSFT paying a larger dividend sure would make a lot of sense than sqandering shareholders' billions on ill-fated projects and acquisitions.

[Tom B]

Roger-- not to imply any malfeasance on your part-- but what's your financial interest in this deal? MSFT has no track record on content-- look at MSN. MSFT has no track record on the internet at all-- they couldn't even manage HotMail properly. And, you know, Bill Gates has left the building, and MSFT has executed VERY poorly on Vista, Zune, and XBox. Sure YHOO is populated by a lot of underproducing do-dos, but the company does a FEW things well. I believe they can manage themselves better than a hostile carpetbagger.