Liberty Mutual's purchase of Seattle-based insurer Safeco was already a done deal when the two insurance companies disclosed their plans...
Liberty Mutual’s purchase of Seattle-based insurer Safeco was already a done deal when the two insurance companies disclosed their plans Wednesday. Not so much with Microsoft’s three-month quest to buy Yahoo.
The two technology giants have tussled publicly since Microsoft announced its takeover proposal Feb. 1. They’ve exchanged carefully worded statements and spread details of their negotiations and prospects through the media in a bid to gain the upper hand and sway investor opinion.
Now, the story begins a new and likely decisive chapter. Microsoft Chief Executive Steve Ballmer threatened three weeks ago to launch a hostile takeover of Yahoo if the companies had not concluded an agreement by today.
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On Thursday, Chief Financial Officer Chris Liddell softened the mandate slightly: Microsoft must “make progress with Yahoo towards an agreement by this weekend,” or it will consider alternatives including a hostile bid or dropping the deal.
Barring successful eleventh-hour negotiations, Liddell said Microsoft will make its move next week.
Microsoft’s interest in Yahoo centers mainly on one thing: the lucrative online advertising business and Google’s seemingly unstoppable domination of it. A Microsoft-Yahoo marriage, the thinking goes, would mean stronger competition in the market while potentially strengthening Microsoft in areas outside its core software business.
As the deadline kicks in, here’s a look at the options available to the company, along with the likelihood of each (according to observers tracking the deal), and their possible outcomes.
If Microsoft really wants Yahoo — and Yahoo’s board of directors won’t budge — it may try to gain control through a hostile takeover. This probably wouldn’t involve an invasion of Yahoo’s Sunnyvale, Calif., headquarters, but it’s about as close as it comes in the business world.
The attack would be two-pronged: Microsoft would invite Yahoo shareholders to exchange their stock in the company for a combination of cash and Microsoft stock. This is called an exchange offer (when the payoff is in stock) or a tender offer (when the payoff is in cash). The terms could differ from what Microsoft currently has on the table, which proposes a half-stock, half-cash transaction.
In Ballmer’s letter, he suggested a hostile takeover could reduce the value of Yahoo to Microsoft, and, presumably, what he’d be willing to pay.
Yahoo’s corporate bylaws include a “poison pill,” provisions to prevent an acquirer from gaining control in this manner, but if enough shareholders formally express interest in selling, it would put tremendous pressure on Yahoo’s board of directors.
Microsoft would likely coordinate the exchange offer with a proxy fight — a campaign to replace the Yahoo board with its own hand-picked candidates. They would stand for election at Yahoo’s annual meeting, which has yet to be scheduled but must take place by July 12. If a majority of Microsoft’s candidates were elected, they could approve the takeover proposal, perhaps at a lower price.
Scott Keller, a founder and analyst at Deal Analytics, called this a “much more potent weapon.” If Microsoft is successful, it would gain control of Yahoo.
Likelihood: The threat has been on the table from the outset, and Ballmer’s ultimatum letter charted the hostile course explicitly. Keller called it a moderate possibility. Sid Parakh, technology analyst with McAdams Wright Ragen, said he thinks Microsoft will attempt a hostile takeover likely involving a lower price.
Outcome: This would kick off a long, acrimonious few months as the companies step up campaigns to sway Yahoo investor opinion before the shareholder meeting. It could continue distracting executive and employee attention at both companies from their efforts to catch runaway online advertising leader Google — the impetus for the combination in the first place.
If Microsoft is successful, the daunting challenge of integrating the two companies could be exacerbated by bad feelings among the Yahoo rank-and-file. Key engineering talent could head for the exits.
Keller said that’s unlikely a long-term concern for Microsoft. There could be “short-term defections, a lot of blood shed in the media,” he said.
Ballmer and Liddell made clear this week that they were prepared to drop the bid. It could be posturing; there’s been no shortage of that. But some analysts see it as a credible threat.
While having Yahoo would accelerate Microsoft’s efforts to gain a bigger slice of the online advertising market, forecast to reach $80 billion by 2010, Liddell said the company has a strategy to do so without the Internet giant.
If it walks away, Microsoft would keep investing in its own online services, including Internet search and e-mail; improving tools for digital advertisers and publishers; and increasing use of its products. Microsoft will also continue to buy companies that would help in these areas, Liddell said.
Likelihood: Tech pundit Henry Blodget wrote Friday that he puts the chance of Microsoft dropping its bid at 60 percent.
Others say Microsoft is committed.
“I don’t think they’ll quit. I think they’ve got too much invested to quit, and frankly nothing’s happened that they shouldn’t have anticipated going in,” said Philip Bromiley, professor of business strategy at University of California, Irvine.
Parakh gives this option about a 10 percent probability.
Outcome: Yahoo’s stock was at a four-year low of $19.05 before Microsoft’s offer. It immediately jumped into the high $20s. There’s reason to believe it could take a similar fall without Microsoft’s acquisition proposal, though Yahoo’s management has argued that Microsoft’s bid undervalues the company in light of a new growth strategy. Investors belief in that strategy would be tested by this scenario. On Friday, Yahoo shares closed at $26.80.
From Microsoft’s perspective, it would be on its own trying to close a yawning gap with Google. Its share of U.S. Internet searches was 9.4 percent in March, compared with Google’s 59.8 percent, according to comScore.
Anything’s possible. Ballmer and Yahoo co-founder and CEO Jerry Yang, with their lawyers and investment bankers in tow, could decide to get together for a backyard barbecue to talk things out. If they start to make real progress toward a deal, Microsoft would be unlikely to derail the talks even though its deadline has passed.
Likelihood: Rumors may well fly this weekend, but the companies have met informally on several occasions to no avail. Both companies reported quarterly earnings this week, and the numbers did little to tilt the balance of investor opinion.
Outcome: Status quo.
Microsoft has given no indication that raising the price is in the cards. It was unmoved to do so by the better-than-expected first-quarter earnings Yahoo reported on Tuesday. No credible alternative bidders have emerged.
Here’s what Liddell said on the subject Thursday: “The strongest argument that I’ve heard on why we should increase our bid — simply that we can afford to — is not one that I favor.”
He called the initial offer “extremely generous” and Microsoft has “yet to see tangible evidence that our bid substantially undervalues the company. In fact, we see the opposite.”
Likelihood: Low. But there are still analysts who think Microsoft has room to offer $1 or $2 more per share, making its offer nearly irresistible compared with Yahoo’s less-certain go-it-alone or partnership strategies.
Outcome: If the bid was bumped up a few bucks, it could juice Yahoo’s stock, send Microsoft’s shares down a bit and just might put the acquisition on a fast track.
Benjamin J. Romano: 206-464-2149 or email@example.com