Ballmer threatens to oust Yahoo's board

By David Worthington

April 7, 2008 —

In a sharply worded letter to Yahoo's board of directors, Microsoft CEO Steve Ballmer threw down the gauntlet last weekend and threatened a hostile takeover, with an explicit warning not to let a three-week window of opportunity for a friendly transaction pass. But Yahoo, playing a classic defensive strategy, may force Microsoft to open its wallet in a true full-court press.

In the April 5 letter, Ballmer bemoaned what he deemed the unsatisfactory pace of negotiations since Microsoft made its US$44.6 billion proposal to acquire Yahoo at the end of January. Yahoo’s management, led by CEO Jerry Yang, has urged shareholders to reject the proposal, and Yahoo’s board formally declined the offer on Feb. 11, saying that it undervalued the company.

Ballmer’s chief complaints are the “limited interaction” between the management of the two companies since the offer and the lack of substantive progress toward a transaction.

Ballmer stated, “Now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement on a combination of our companies.” He set a three-week deadline for that to happen and threatened to initiate a proxy contest to elect an “an alternative slate of directors for the Yahoo Board” if it did not come to the table.

Directions on Microsoft analyst Greg DeMichillie commented that it was in Microsoft’s best in interest to wrap the deal up quickly. The longer it takes to conclude, he said, the more Yahoo’s best and brightest engineers will depart the company, adding that a friendly deal would allow Microsoft to more easily identify the elite among those who remain.

Yahoo’s board struck back at Ballmer’s claims in a letter sent out today. The board accused Ballmer of mischaracterizing the nature of its discussions with Microsoft and noted that the companies have had “constructive conversations” about integration and regulatory issues.

The letter went on to turn the tables on Ballmer, revealing that Microsoft has failed to supply Yahoo with information it requested on March 28 about anti-trust and regulatory issues associated with the transaction.

Ballmer’s letter also reiterated Microsoft’s position that it is offering “a premium” for Yahoo, one that is even more significant now, citing “public indicators” that suggest Yahoo’s share of the Internet search market and overall page view has fallen since January.

In reality, Yahoo appears to be hovering, not sinking. A March 26 market share report by Nielsen/NetRatings gave Yahoo a 17.6% share of the US search engine market. It held a 17.7% share in December.

By comparison, Google, the market leader, was shown to have a 58.7% share of the market in March, and Microsoft’s MSN and Live Web properties had an 11.2% share.

DeMichillie said that Microsoft appears convinced that it is so far behind Google in the search market, it must buy its way into second place. “There have no path to get competitive without Yahoo, but with Yahoo they can claw their way up,” he remarked.

For its part, Yahoo’s board has rejected Microsoft’s assessment. Its position remains that any transaction must fully reflect the value of Yahoo, including any strategic benefits to Microsoft that would provide certainty to Yahoo shareholders.

The board’s reply cited Yahoo’s free cash flow and earnings potential, recent investments in advertising platforms and future growth prospect, strong global brand and large worldwide audience, and its unconsolidated—or off-the balance sheet—investments as factors in its decision.

Ballmer also raised a new talking point, faulting Yahoo for adopting new plans that have made any change of control more costly. Over the past two months, Yahoo has introduced the Amp advertising management platform and several mobile product offerings.

He wrote, “We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.” Ballmer’s letter ended with an indictment of Yahoo’s board for failing to give due consideration to a transaction that according to him has “tremendous benefits” for Yahoo’s employees and shareholders.

Yahoo’s first quarter 2008 financial results are due out May 8. Laura DiDio, a senior analyst with Yankee Group, said that Microsoft will have no other option than to raise its bid if those results are strong. “If they are weak, or so-so, then it’s game-set-match Microsoft,” she said, adding that the present economic conditions may be against Yahoo.

Yahoo’s board indicated that although it is not opposed to a transaction with Microsoft, it was still exploring its strategic alternatives, and claimed that a “significant portion” of the company’s shareholders agrees that Microsoft’s proposal undervalues Yahoo.

The board also noted that the value of the proposal might be significantly lower than when it was made as a result of a decrease in Microsoft’s stock price. Microsoft’s stock price has slipped slightly from $31.91 on Jan. 31 to its opening price of $29.55 at the beginning of today’s trading.

DiDio said that the board’s willingness to entertain a deal with Microsoft is evidence that Ballmer’s pressure tactics are working. He “holds the upper hand in terms of being in a stronger position than Yahoo’s current board of directors. Yahoo is not adverse to Microsoft taking it over; it just wants better terms,” she observed.

Related Search Term(s): Microsoft, Yahoo

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Microsoft: Yahoo deal possible with Icahn Microsoft is hedging its bets on billionaire investor Carl Icahn's campaign to replace the Yahoo's board of directors with a slate that is more open to dealing with Microsoft.

Microsoft and Yahoo continue negotiations Microsoft is still open to pursuing another deal with Yahoo to bolster its own online advertising and search business. Yahoo says it is open to any transaction that maximizes shareholder value.

Ballmer hints at another offer for Yahoo Though nothing definite was said, comments made by Steve Ballmer today have reignited speculation about Microsoft acquiring Yahoo. Yahoo's stock rose in response to the statement.

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