The next act of the carefully choreographed Microsoft-Yahoo (MSFT YHOO) drama is playing out, with Microsoft now suggesting that it always knew it would have to go hostile and has therefore been planning to do so for months.
Will Microsoft really try to get Jerry and the board fired? Will they succeed?
Microsoft likely still views a full-on proxy fight as a last resort. The best way to avoid that last resort, however, is to act as though you have every intention of going through with it–and that’s just what Microsoft is doing. Microsoft’s preferred goal here is almost certainly to force Yahoo to the negotiating table, at which point Steve will toss Jerry a face-saving bone of a couple of dollars a share. In the meantime, to encourage Jerry to sit down, Steve will press forward with getting Jerry fired.
What are the odds of success? The WSJ includes a couple of helpful stats. In the past 7 years, there have been about 500 proxy battles, of which only 5% (27) resulted in the hostile attacker actually ousting members of the target’s board. In 63% of hostile takeover cases, meanwhile, the acquirer has ended up raising its bid.
These stats alone suggest Microsoft has a slim chance of getting Jerry fired, but we think the specifics of this case vastly improve its odds.
- First, Yahoo’s entire board is up for re-election this year. In most cases, board elections are staggered, so it takes an activist several years to gain control. In this case, however, Microsoft can get Yahoo’s entire board sacked in one go.
- Second, unlike most proxy fights, this is a huge, high-profile deal that will encourage lots of shareholder participation. In many proxy fights, shareholders are too bored or apathetic to take a side. Thus, the incumbents (management) have a distinct advantage. In this fight, however, Microsoft will be able to make its case clearly through the press, and a lot of Yahoo shareholders will probably be eager to support it.
- Third, lots of Yahoo shareholders already want this deal. Faced with the choice of a Microsoft acquisition or the stock price going back to $19, a significant portion of Yahoo shareholders will likely want the money. Taking the money, in this case, means helping Microsoft fire Yahoo’s board. So we expect Microsoft’s coup will quickly gain a lot of support.
Microsoft has about another three weeks to nominate a slate of directors, and then three months to campaign before the shareholder meeting in June (at which it could actually get Jerry fired). Until Yahoo sits down to talk, Microsoft will likely proceed as though ousting Yahoo’s leadership is the only course left open to it–and, if necessary, it will go ahead and try. Proxy fights like this are long, ugly, and distracting, however, so regardless of what Microsoft says and does, its first choice will still likely be to get Yahoo to the table.
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