Yahoo may be reluctant prey for Microsoft. But that doesn’t mean the former Internet wunderkind has a lot of choices.
Yahoo Monday formally rejected Microsoft’s $44.6 billion offer. But in many ways, Yahoo’s hands may be tied in escaping Microsoft's grasp. (Msnbc.com is a joint venture of Microsoft and NBC Universal.)
Microsoft made it clear that its executives have no plans to drop their pursuit. "Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties," the Redmond, Wash.-based company said in a statement.
Yahoo’s CEO and founder Jerry Yang is in a tough spot: find a better solution or wheedle a better price out of Microsoft. And the latter solution seems like the likeliest scenario.
Last week, Microsoft seemed to have landed a knockout punch, says Jeffrey Lindsay, a senior analyst at Sanford Bernstein. Now, it seems that Yahoo has gotten off the deck and is fighting back. Still, after years of management missteps and sagging stock price, Yahoo’s options appear limited.
No white knights are likely to save Yahoo. Very few companies have the hefty amounts of cash needed to nab an expensive prize like Yahoo.
Google cannot step in because a Yahoo-Google merger would likely be considered a violation of antitrust regulations, considering that Google practically owns the search ad market. Rupert Murdoch's News Corp., which wanted to buy a 25 percent share in Yahoo last June, is probably not interested in the entire company, say analysts.
So Yahoo might run up against a shortage of tricks to wriggle out of this deal.
Attempts to reshuffle Yahoo haven’t worked either. A recent 100-day plan to revitalize the company was a flop, says Lindsay. Another management-by-slogan strategy, which was to become a “must buy” for advertisers, didn’t convince shareholders, he says. “Analysts will look at any new strategy in great detail,” says Lindsay, referring to Yahoo’s missteps.
Accelerating its ad business to shore up its defense might be Yahoo’s best option. For example, Yahoo could outsource its paid search to Google, which would cut staff and sweeten Yahoo’s stock price. Or Yahoo could attempt to buy AOL’s advertising and content assets. However, some analysts think such bold moves are unlikely.
“Yahoo isn’t in a strong position to start making large acquisitions,” says Andrew Frank, a research vice president at Gartner Inc. “Microsoft will try many ways to make Yahoo come willingly.”
Yahoo also is handicapped because it spent a large wad of cash, nearly $4.6 billion, on two big share buybacks over the past three years — depleting its finances.
Sanford Bernstein’s Jeffrey Lindsay thinks that a sweetened bid of $40 or higher — compared with the current $31 — would sway shareholders. However, if Microsoft bids over $35, the deal wouldn’t be as profitable. “Still, Yahoo could make a legitimate case for a higher valuation,” says Lindsay.
One thing is certain: A long, nasty battle could hurt both parties.
Microsoft does not intend to back down, but the company must answer to its large institutional shareholders, who already have seen the company's share price drop 6 percent since the bid was announced.
And Yahoo could also alienate its millions of users, depleting its value. “Yahoo’s main leverage is the loyalty of its staff and its supporters,” says Frank, of Gartner. In media businesses, talent and loyalty are especially highly valued.
For now, analysts think that Yahoo will protect itself with a "poison pill." Yahoo's poison pill, also known as a shareholder rights program, would kick in if anyone accumulates 15 percent of the company's shares. The plan gives existing shareholders the right to buy more shares, diluting the stake of a would-be buyer. That prevents Microsoft from simply buying up enough shares of Yahoo to give it control.
“The poison pill will work in the short term,” says Lindsay.
At Yahoo’sannual shareholders meeting in June, Microsoft can try to replace Yahoo’s entire board of directors. Microsoft could appeal to small investors and large institutions, gathering together enough votes to replace the board in a proxy fight. Investors and institutions may be eager to cash in. Some 54 percent of Yahoo shares traded hands in the past five days, says Lindsay.
Ultimately, both Microsoft and Yahoo badly need big wins. The urge to please investors, institutions and customers seems to be pulling the two companies together magnetically. “However, as long as Yahoo resists an offer, then the ball is in Microsoft’s court to come up with formula that works,” says Frank.
Complicating matters, Yahoo has a lot of pride in its role as an Internet innovator and pioneer, adds Frank. “It wants reassurance" that its brand will survive the merger," said Frank.
Even if the Microsoft's bid succeeds, the giant software company faces years of integrating Yahoo into its culture and passing antitrust overseers like the Justice Department. Given that government regulators have gunned for Microsoft before, this merger could be yet another large hurdle.
As the bid plays out, Yahoo executives may end up wishing they had scooped up Google when they had the chance. Google has posted on its web site how Yahoo founder David Filo “agreed that [Google’s] technology was solid, but encouraged [Google founders] Larry and Sergey to grow the service themselves.” That act may have been Yahoo’s Waterloo.