By John W. Schoen Senior producer
msnbc.com
updated 3/26/2008 7:27:19 PM ET 2008-03-26T23:27:19
COMMENTARY

Microsoft's recent bid to take over rival Yahoo — whose board of directors has said "No thanks" to the offer — has touched off the latest example of the cat and mouse game known as a hostile takeover. So why does it have to be so hostile? Can’t Microsoft just call up a stock broker and start buying all of Yahoo's shares?

If Microsoft has the money to buy Yahoo! why can't they just purchase the shares via the stock exchange? It may take more time buying it a little piece at a time but eventually couldn't Microsoft buy all the shares they want?
A.J., Rochester, Minn.

It’s been awhile since merger mania produced a wave of high-profile takeover battles, but Microsoft’s recent bid for Yahoo is following a fairly well-worn path in the corporate acquisitions game. (Msnbc.com is a joint venture of Microsoft and NBC Universal.) In theory, buying another company is a simple matter of buying all of its shares in the public market. But over the years, Wall Street’s lawyers and investment bankers have developed a complex playbook of offensive and defensive maneuvers that make the process anything but simple.

When one company wants to take over another one, it’s much easier — and cheaper — to arrange a “friendly” deal that has the blessing of the target company’s board of directors. What Microsoft originally tried what’s known in the trade as a “bear hug” — a highly public offer designed to look so attractive to shareholders that the company’s management goes along with the plan.

But Yahoo’s board of directors decided to not go along with the deal, saying they think their shareholders can do better. They may be trying to get Microsoft to raise its $31-a-share offer. Or they may be hoping another bidder — a so-called “white knight” — will come along and offer more money. Or the board may think Yahoo stock’s recent slump — from more than $33 a share last fall to $19 a share just before Microsoft’s bid — is temporary.

Having failed to win over Yahoo’s board, Microsoft could just start buying stock on the open market. But it would run into one of the more effective obstacles in the takeover defense playbook, a provision known as a “poison pill.” This measure says that if a hostile bidder buys 15 percent of Yahoo’s stock, the company can flood the market with new shares that sell for a steep discount to the market price.

The idea is to make it almost impossible for the acquiring company to swallow up all the shares of its target. Some companies take these defensive measures to extremes with defensive provisions that make them extremely unattractive as a target, like spinning off their best assets or triggering a large debt payment, also known as “suicide pill” or “scorched earth” defenses.

Another way to get around an uncooperative board of directors is to replace them — with a so-called proxy fight. Some companies “stagger” their board of directors, with terms that expire in different years so they can’t all be replaced at once. (Yahoo hasn’t done that.) To remove a board, you have to get a new slate of directors listed on the proxy ballot that is sent to shareholders every year before the annual meeting, usually in the spring. Microsoft has until mid-May to nominate candidates who would go along with its offer; it would then have to wage a campaign to get a majority of shareholders to vote for its hand-picked candidates.

Proxy battles are often fought on two fronts: public and private. Publicly, companies engaged in a proxy war often take out full-page ads trying to convince shareholders of the wisdom of their position. Privately, proxy combatants contact investors holding the biggest stakes to try to line up their vote. Though Yahoo has 1.3 billion shares outstanding, roughly 70 percent of them are in the hands of 526 fund managers (as of the latest filing.)  And more than a third of Yahoo’s stock is held by the top 10 biggest shareholders.

So it’s a safe bet those fund managers’ phones have been ringing of the hook lately.

I have heard that the stimulus package also temporarily raised the "jumbo" mortgage threshold from $417,000 to $725,000. I have been searching for an article to tell me the impacts, but many sites have conflicting information as to WHEN this will happen, and how long it will last. Some seem to imply this is a "forever" update while others say it's just from March of 2008 to December of 2008.
— Jared J., California

There’s something about this stimulus package that readers can’t seem to get enough of: The last couple of columns on tax rebates generated more mail than any other topic in five years of writing this column. (For those still puzzled about whether you’ll get a check, we suggest you just fill out your return, send it in and hope for the best. It’s time for the Answer Desk to move on.)

As for the provision in the Economic Growth Act of 2008 that deals with mortgages, this stimulus provision is only temporary. Congress has been tussling for the past two years over a number of proposals to “reform” the government agencies that buy up mortgage loans, Fannie Mae and Freddie Mac, and the Federal Housing Authority, which insures some mortgages. Some want to give these agencies more latitude in taking on bigger — and riskier — loans. But opponents of these changes — including some regulators — worry that the proposals could put taxpayer dollars at greater risk.

As a compromise, Congress and the White House agreed to include a provision in the tax stimulus package that raises limits on mortgages bought by Freddie Mac and Fannie Mae (currently $417,000) and those backed by the Federal Housing Authority (currently $362,000). The new limits are $729,750 — but only for loans written before Dec. 31, 2008.

The higher limits are also restricted to a handful of the most expensive housing markets in the country. So don’t look for government backing for a mortgage on your new ski hideaway in Colorado. The FHA is currently working up guidelines for which markets qualify; once that’s done the new limits should go into effect within 30 days.

It remains to be seen just how many homeowners will benefit from the new limits, and whether these new "jumbo-jumbos" will have the desired effect of lowering mortgage rates for these supersized loans. Some Wall Street analysts who’ve looked at the plan say a lot depends on how tight the lending requirements are when the rules are finalized. Given the general skittishness about credit these days, if Wall Street thinks these bigger jumbo loans are riskier than those written under the lower limits, the market could demand higher rates to be compensated for that risk.

So we won’t really know just how much stimulus these higher limits will offer the housing market until the money starts flowing in a few weeks.

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