Yahoo to Reject Microsoft Bid: Reports

Yahoo! Finance

In a bid to remain independent, Yahoo plans to reject Microsoft Corp.’s unsolicited takeover offer, according to reports on the Wall Street Journal’s web site.

Quoting sources familiar with the situation, the Journal reports that Yahoo’s board feels the offer of $31 per share “massively undervalues” the company. A letter spelling out the position is expected to be sent Monday. Yahoo also expressed concern that Microsoft’s offer does not account for risks to Yahoo should the deal be overturned by regulators.

The Journal source said the company would be unwilling to consider an offer below $40 per share, which would represent a $12 billion increase over Microsoft’s original $44.6 billion bid. It is unclear if Microsoft would be willing to increase its bid by such a significant amount.

A Yahoo representative said the company would not comment on rumor or speculation and reiterated that the board is evaluating all its strategic options.

The two companies have been in discussions about an alliance or merger for more than a year. Yahoo has long hoped to remain independent, believing it can reverse its fortunes and lift its flagging stock price.

In the summer of 2007, investors believed it was possible as well. Yahoo co-founder Jerry Yang replaced Terry Semel as CEO and announced he would unveil a new strategic plan for the company within 100 days.

“There will be no sacred cows and we need to move quickly,” he said. But, after the 100 days – and then some – passed, investor patience wore thin, driving the stock lower.

In late January, the slumping Internet pioneer reported a fifth-consecutive quarter of lower profits and warned of “headwinds” for 2008. Yahoo’s battered stock fell to a four-year low, below the $20 per share level, and Microsoft pounced.

Yahoo shares are currently 51 percent above their pre-bid value. In contrast, Microsoft shares have dropped about 13 percent since the bid was announced, far worse than the Standard & Poor’s 500’s loss of 4 percent.

The second-guessing about Microsoft's unsolicited bid is typical for large acquisitions. Investors are debating whether the benefits outweigh the potential management distractions, sagging employee morale and other headaches that can arise after the deal is done.

Should Microsoft decide to increase its offer, it could still turn up the pressure by drawing upon its $21 billion in cash and lofty market value of $265 billion to raise the bid.

Microsoft Chief Financial Officer Chris Liddell said the software company may issue some debt to finance the cash portion of its 50-50 stock and cash offer for Yahoo, instead of drawing down its entire $21 billion cash pile.

"It's likely we're actually going to borrow for the first time," said Liddell in an annual strategy meeting with analysts before Yahoo’s apparent decision. "It's going to be a mixture of the cash we have on hand plus debt.”

Since Microsoft’s initial bid, there has been a significant amount of discussion about antitrust concerns. Google’s chief legal officer David Drummond, writing on the company’s blog, said “Microsoft's hostile bid for Yahoo raises troubling questions. This is about more than simply a financial transaction, one company taking over another. It's about preserving the underlying principles of the Internet: openness and innovation."

Microsoft made similar comments when Google CEO Eric Schmidt reached out to Yahoo about a potential partnership following the bid.
While some investors held out hope for a white knight bidder, none surfaced after Microsoft’s initial bid. News Corp. CEO Rupert Murdoch ruled out a bid during a Feb. 4 conference call. Other potential suitors, such as Comcast and AT&T, opted against going against Microsoft’s deep pockets, as well.

Additional reporting by the Associated Press and Reuters

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