By gearing up for a proxy fight with Yahoo, Microsoft is showing its willingness to fight a battle it is likely to win, analysts say.
Yahoo’s shareholders, they say, are fed up with the company's poor performance and missteps. And they could turn out to be Microsoft’s best allies.
“Microsoft is already soliciting shareholders,” says Jeffrey Lindsay, an analyst at Sanford Bernstein. “It is taking a hard line on Yahoo.”
The main sticking point is Microsoft’s $31-a-share stock offer, originally valued at $44.6 billion and rejected as too low by Yahoo.
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Yahoo shares were at a 52-week low of $19 when Microsoft announced its bid Feb. 1, but as recently as October it was trading for $34 a share. “Shareholders must be asking themselves what has changed in that time,” says Bob Peck, an analyst at Bear Stearns.
So far, Microsoft is playing a smart game. Known more as brilliant at business than technology, Microsoft is an aggressive player that wisely uses its assets. An increased bid of just $1 a share would cost Microsoft another $1 billion. Microsoft Chairman Bill Gates declared in an interview this week that the current offer is "fair."
Meanwhile, Microsoft reportedly has hired Innisfree, a merger firm that could help it mount a proxy fight aimed at unseating Yahoo's board. The message is clearly partly a negotiation ploy, although it also signal's Microsoft's willingness to go to the mat, say analysts.
Conversely, Yahoo is weak and is exhausting other options for its impatient shareholders. In a letter to shareholders, Yahoo chief executive Jerry Yang says that “we remain committed to pursuing initiatives that maximize value for all of our stockholders.”
But what initiatives? A deal with Rupert Murdoch's News Corp. reportedly was being explored last week. Under the scenario being discussed, News Corp. would swap a stake in its MySpace social networking site for a stake in Yahoo. But similar talks have faded away before and probably will add up to nothing, analysts say.
Bagging Yahoo makes sense for Microsoft because the software giant could squeeze $1 billion in annual cost savings from the deal, say analysts. News Corp. has no ability to generate cost savings from the asset swap, says analyst Jonathan Yarmish of AMR.
In rebuffing Microsoft, Yahoo is hoping to get a better price, say analysts. The board has a fiduciary responsibility to make sure that if Microsoft nabs Yahoo, the price is a bit sweeter. “Yahoo’s board directors doesn’t want to get sued,” says Peck.
“Some of the board’s core decisions have been questionable,” adds Peck. “They aren’t as active as they could have been.”
Microsoft has a limited time frame to act. To launch a proxy fight and unseat Yahoo’s board at the shareholder meeting in June, Microsoft must nominate its own choices by March 14. All 10 of Yahoo's directors are up for re-election at the annual meeting.
Proxy fights are rare, but when they materialize have about a 50-50 chance of success, says Lindsay. But Microsoft "has a high probability of succeeding” because Yahoo has few other options to offer shareholders, he said.
Analysts think Microsoft is likely to boost its offer before the June shareholder meeting. “The power lies in the hands of shareholders,” says Peck. “They are expecting — and want — a raised bid to get the deal done.”
One big question: What happens to Yahoo’s asset value during a fight? Will Yahoo be worth buying, as the brand gets tarnished?
Analysts say that Yahoo is already deteriorating. Silicon Valley recruiters are gunning for the most coveted employees at Yahoo, which is already laying off 1,000 of its 14,000 workers, and many are landing at rival companies like Google.
These rapidly changing environment bodes well for a quick settlement between Microsoft and Yahoo.
“The deal has to happen fast,” says Lindsay. “But, Microsoft will prevail.”