Microsoft-Yahoo talks reopen

By Candice Jones for Microsoft

Johannesburg, 19 May 2008

Microsoft is exploring a new deal with Internet company Yahoo, which may not involve a full buyout of the company.

"Microsoft is considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo, but not an acquisition of all of Yahoo," the software giant said in a statement. At this stage, Microsoft has not released any details regarding the deal.

Microsoft first offered to buy Yahoo with a bid of $31 a share - a value of $44 billion - at the end of January. However, the Yahoo board publicly rejected Microsoft's offer. Chairman Roy Bostock and CEO Jerry Yang said Microsoft's offer did not meet the actual value of the company.

Subsequently, Microsoft threatened Yahoo with the possibility of a hostile takeover, if the Internet company did not come to the negotiating table. Microsoft CEO Steve Ballmer warned it would pursue a proxy contest aimed at electing an alternative slate of directors for Yahoo.

Retaliation

Yahoo, in turn, threatened Microsoft with the possibility of a Google-Yahoo partnership, which would make "Yahoo undesirable as an acquisition for Microsoft".

While Microsoft seems to have shifted its focus to a less aggressive approach, its most recent statement says it will not rule out the possibility of a new buyout bid. "Microsoft is not proposing to make a new bid to acquire all of Yahoo at this time, but reserves the right to reconsider that alternative, depending on future developments and discussions."

While Yahoo has confirmed that talks are in progress, it still looks to be holding out for a better deal. "Yahoo's board of directors will evaluate each of our alternatives, including any Microsoft proposal, consistent with its fiduciary duties, with a focus on maximising stockholder value."

In the meantime, Yahoo says it's jostling to nail down an arrangement to mollify unhappy shareholders.

Shareholder action

Following in Microsoft's footsteps, billionaire investor and activist shareholder Carl Icahn sent an open letter to the Yahoo board, last week, with a vote of no confidence. "It is clear to me that the board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft."

The letter indicated he planned to oust the current board in a proxy fight over the failed merger with Microsoft. "During the past week, a number of shareholders have asked me to lead a proxy fight to attempt to remove the current board and to establish a new board which would attempt to negotiate a successful merger with Microsoft," said Icahn.

Icahn bought 59 million shares and share-equivalents of the Internet company and formed a 10-person slate to stand for election against the current board. In addition, Icahn approached the Federal Trade Commission to gain anti-trust clearance for a Microsoft merger.

He has also asked Yahoo to explain what "alternative deals" Yahoo may be looking at and has urged the company to discuss these with the shareholders before any deals are made.

On the defensive

As recently as Friday, global reports indicated one of the "value maximising strategic alternatives" could include Google. According to the New York Post, sources close to the situation say the companies plan to announce a deal this week.

However, Yahoo has made no indication that a deal with Google is on the table. In response to Icahn's letter, Yahoo said it is not involved in any deals that would jeopardise a merger with Microsoft. "None of the alternatives we are considering would preclude us from entering into a transaction with Microsoft or any other party."

Yahoo remains defensive in its decision to reject Microsoft's increased $33 a share offer and push for $37 and is scrambling to protect its current board members.

"A fair-minded review of the factual record leads to one conclusion: that Yahoo's 10-member board, comprising nine independent directors, along with Yahoo CEO Jerry Yang, remains the best and most qualified group to maximise value for all Yahoo stockholders," the company said in its response to Icahn.