Yahoo to Reject Microsoft Offer, May Find Few Options (Update2)

By Ari Levy and Zachary R. Mider


Feb. 10 (Bloomberg) -- Yahoo! Inc., the Internet company that has failed to crack Google Inc.'s dominance of Web search, plans to reject a $44.6 billion takeover bid from Microsoft Corp., a person familiar with the situation said.

The board spent a week reviewing the $31-per-share unsolicited offer before deciding it was too low, and directors are likely to reject it tomorrow, said the person, who declined to be identified because the discussions aren't public. Yahoo wants at least $40, the Wall Street Journal reported yesterday.

The decision steps up pressure on co-founder Jerry Yang to present investors with a strategy to revive a stock that lost half its value in the two years before the offer. He may look to outsource its search efforts to Google or find another buyer, though analysts said it is unlikely that any other options will emerge and Microsoft may make a higher offer to win.

``A lot of this is gamesmanship on the part of Yahoo,'' said Scott Kessler, an equity analyst at Standard & Poor's in New York who recommends holding Yahoo and buying Microsoft. ``Microsoft is well aware that Yahoo doesn't have any other options. What this is about is how much Microsoft wants Yahoo and how much time they're willing to wait to get this deal done.''

Lucrative Market

Microsoft, the biggest software maker, could pay $40 for No. 2 Internet search company Yahoo, Kessler said. It is more likely the companies reach a deal for less, he said. UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor, said last week Microsoft may have to bid $34 to $37.

Yahoo spokeswoman Diana Wong said yesterday the company doesn't comment on rumors or speculation. Microsoft spokesman Bill Cox declined to comment.

Yahoo, based in Sunnyvale, California, has posted eight straight quarters of profit declines and spent years trying and failing to catch up with Google in Web queries and the lucrative market for ads linked to search results.

Together, Microsoft and Yahoo would control more than a quarter of the market for animated ads and colorful display banners at the top of Web pages. Google hasn't made much progress there, giving the combined company a way to challenge Google and start going after emerging markets such as mobile-phone ads.

Hostile Measures

Still, Yang, 39, has resisted letting go of the company he co-founded in 1995 as a graduate student at Stanford University. He replaced Terry Semel as chief executive officer in June and intended to craft a strategy to revitalize Yahoo.

Yahoo is betting Microsoft won't take hostile measures to win the bid, the Journal said, even though the software maker has indicated that is a possibility. A person familiar with the matter said last week that Redmond, Washington-based Microsoft may seek to oust Yahoo directors should they reject its offer.

``Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!'s shareholders are provided with the opportunity to realize the value inherent in our proposal,'' Microsoft CEO Steve Ballmer said in a letter to Yahoo's board that was made public when the offer was announced Feb. 1.

Yahoo rose 16 cents to $29.20 Feb. 8 in Nasdaq Stock Market trading and Microsoft added 44 cents to $28.56.

The offer is 62 percent more than Yahoo's stock price before the bid. The shares have climbed above the value of the cash-and- stock bid, showing shareholders expect a higher price. Microsoft plans to let investors choose cash or stock, at a ratio that will end up being about 50-50.

Google Possibility

Microsoft shares have declined since the bid, lowering the value of the stock portion and pushing the total value of the deal to about $29.08 a share.

Yahoo is getting financial advice from Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Moelis & Co., according to two people familiar with the matter. Morgan Stanley and Blackstone Group LP are counseling Microsoft.

Yahoo might seek help from rivals, soliciting other bids or seeking partnerships with Rupert Murdoch's News Corp. or Google to thwart Microsoft, according to analysts, including Stanford Group Co.'s Clayton Moran. The Times of London reported today that Yahoo is considering restarting merger talks with Time Warner Inc.'s AOL Internet unit.

Google CEO Eric Schmidt contacted Yang to suggest a partnership, the New York Times reported Feb. 4. A partnership with Mountain View, California-based Google may allow Yahoo to outsource its search service, shedding the costs of running its own search engine and sharing ad revenue with its larger rival.

Google spokesman Matt Furman declined to comment.

While a Google partnership is an option, it would face stiff regulatory scrutiny, Moran said. News Corp. isn't interested in bidding for Yahoo, Murdoch said on a Feb. 4 conference call. That means Yang's options probably won't pan out, said Andrew Frank, a New York-based analyst at researcher Gartner Inc.

The U.S. Justice Department is ``interested'' in reviewing the antitrust implications of a Yahoo-Microsoft transaction, spokeswoman Gina Talamona said after the bid was announced. Neelie Kroes, commissioner of competition for the European Commission, said her agency also would scrutinize a deal.