Yahoo (YHOO) wants to restart merger talks with AOL (TWX) as a way of creating another alternative to a forced merger with Microsoft (MSFT), the Times of London reports. An AOL-Yahoo combination would make sense (See “Why Yahoo Should Buy AOL“), but it isn’t really an alternative. What’s really going on here is that Yahoo’s high-priced advisors are doing an excellent job of earning their fees.
In the past 48 hours, Yahoo’s advisors have taken the company’s perceived position in this negotiation from “no-options-and-might-not-even-get-back-to-$31-a-share” to “several-options-and-won’t-take-less-than-$35-a-share.” How have they done this? By carefully spoonfeeding information to the New York Times, Wall Street Journal, and Times of London.
The first rule of any negotiation is to create the perception of alternatives. In this case, the alternatives Yahoo wants to create the perception of are:
- Other bidders
- Other merger options
- The ability to just say no and go it alone
In the past 48 hours, therefore, the NYT, WSJ, and Times have learned the following
- Yahoo is seriously considering outsourcing search to Google as an alternative to a Microsoft merger (this isn’t an alternative, but it has been carefully positioned as one, and most media outlets–including blogs–are presenting it that way)
- Yahoo may start new merger talks with AOL and Disney (two companies that haven’t yet publicly disavowed any interest in the idea. Neither company would be crazy enough to try to outbid Microsoft, but never mind)
- Yahoo wouldn’t even consider any offer less than $40 a share (i.e., jack your offer up and we’ll talk).
- Microsoft offered $36 a share for Yahoo just last summer (i.e., even Microsoft thinks the company is worth a lot more than $31)
Through the WSJ this morning, Yahoo also provided detailed support for its conclusion that Microsoft’s offer “massively undervalues” the company, including:
- Yahoo’s leading position in display advertising
- No compensation for the risk that regulators will block the deal
- Yahoo’s stock is at a three year low
You’ll notice that none of these include far more common valuation measures such as profit multiples and comparable-company analyses (because on those metrics, Microsoft’s bid looks quite generous). But the reliance on the “undervalued” defence is important: By not rejecting the offer outright, Yahoo’s board has also created the perception that it is working over time to do what it is legally obligated to do, which is look out for the best interests of Yahoo shareholders. If it just rejected the offer by saying it didn’t want to sell, meanwhile, it would get sued.
Microsoft, meanwhile, wants to create the perception of its own alternatives. Such as:
- Going hostile.
- Persuading Yahoo shareholders through one on one meetings.
- Walking away.
Micrsosoft’s CEO Chris Liddell did this quite effectively in his own interview with the New York Times’s Andrew Sorkin today, in which he and Microsoft’s advisors laid out Microsoft’s options:
- “First, Microsoft is planning to crisscross the nation to meet with Yahoo’s largest shareholders in an election-style campaign, hoping they can put pressure on Yahoo’s board”. Microsoft may have an easier time than it could have had two weeks ago: since then, millions of Yahoo’s shares have traded hands to short-term-oriented hedge funds that typically favour a quick sale, as opposed to value investors who hold shares for the long term.”
- “Microsoft could also decide to make an offer directly to shareholders, called a tender offer, which would put more pressure on Yahoo’s board to negotiate. At the same time, Microsoft could also set a deadline for its bid, known as an “exploding offer.”
- Microsoft…”could start a proxy contest to oust Yahoo’s board at its next election; it would have until March 13 to nominate a new slate of directors.”
- Any would-be aquiror needs to be “discplined and ruthless” and “willing to walk away.”
From our perspective, the most interesting piece of information that appeared this weekend was the report that, only two weeks ago, before Yahoo blew Q4, Microsoft had been willing to offer $35 a share. This information, presumably also supplied by Team Yahoo, suggests that it will be relatively easy to get Microsoft back there.
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