ANALYSIS: In this ultimatum Microsoft makes a compelling case that Yahoo’s board is violating its fiduciary duty to shareholders by not even engaging with Microsoft. This, combined with the threat of a bid cut, will likely prompt Yahoo shareholders to turn up the heat on Yahoo’s board and management. It will also likely prompt Yahoo’s board to do some real soul-searching, in which the directors ask themselves again whether they really want to continue down this path.
Given Microsoft’s clear warning and advance notice of a bid cut, Yahoo’s board is presumably risking significant legal liability if it refuses to even engage with Microsoft. As Ballmer makes clear, Yahoo has moved heaven and earth to try to construct any alternative BUT Microsoft, and it would be easy to make the case that Yahoo’s obstinance here is motivated by something other than shareholder interest.
Bottom line, we think Microsoft has played this brilliantly. We think Yahoo now has almost no choice but to come to the negotiating table. The only escape hatch we can imagine is if Yahoo can immediately release the results of a banner Q1 and raise its outlook for the rest of the year. This would bolster its argument that it is worth more and at least allow it to enter negotiations from a position of strength.
Unless Yahoo had a strong first quarter, we also think that, having forced Yahoo’s hand, Microsoft is less likely to throw Yahoo a $3-$4/share bone at the 11th hour (which we think it would have if Yahoo had voluntarily sat down). Such an increase from the current bid value is still conceivable, but we think it becomes less and less likely the more hostile this negotiation gets.
ULIMATUM: Microsoft (MSFT) struck while yesterday’s propaganda campaign was hot, issuing a direct ultimatum to Yahoo (YHOO): The ultimatum came in the form of a letter from Steve Ballmer to Yahoo’s board, and the message was this: Sign merger agreement in three weeks, or we will cut bid and go directly to shareholders.
If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.
Other nuggets in this Saturday afternoon missile attack:
Our goal in making such a generous offer [$31/share] was to create the basis for a speedy and ultimately friendly transaction. Despite this, the pace of the last two months has been anything but speedy.
Translation: In the last two months you have tried to find an escape route by talking to every conceivable white knight in the industry, pitching a dreamy growth plan to shareholders, and trying to ignore us to death. Your efforts have failed, and we’re done being patient.
While there has been some limited interaction between management of our two companies, there has been no meaningful negotiation to conclude an agreement. We understand that you have been meeting to consider and assess your alternatives, including alternative transactions with others in the industry, but we’ve seen no indication that you have authorised Yahoo! management to negotiate with Microsoft.
Translation: Dear Yahoo shareholders: The board of directors of Yahoo, Inc., is violating its fiduciary duty to you. Over the past two months, they have rushed hat in hand to every to every organisation capable of offering any sort of “alternative transaction” in an emotional, irrational quest to avoid selling to Microsoft. How illogical and un-fiduciary is the behaviour of Yahoo’s board? They haven’t even allowed Yahoo management to negotiate with us. If this deal falls through and Yahoo’s stock drops to $17, let there be no confusion about who you should sue.
During these two months of inactivity, the Internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably, both in general and for other Internet-focused companies in particular. At the same time, public indicators suggest that Yahoo!’s search and page view shares have declined. Finally, you have adopted new plans at the company that have made any change of control more costly.
Translation: Go ahead and jawbone about your “growth plan” and “strategic alternatives” and “significant undervaluation.” In part due to your own behaviour and in part due to market conditions, you’re worth less today than you were when we offered you $31 two months ago.
By any fair measure, the large premium we offered in January is even more significant today. We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.
Translation: Over the past month, you have jetted around the country pitching your Microsoft-alternative growth plan to your shareholders, but they haven’t bought it. How do we know? Because your shareholders are our shareholders. We think the majority of your shareholders–enough to get all of you fired–support us, not you.
It is unfortunate that by choosing not to enter into substantive negotiations with us, you have failed to give due consideration to a transaction that has tremendous benefits for Yahoo!’s shareholders and employees. We think it is critically important not to let this window of opportunity pass.
Translation: Enough already.
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