Microsoft (MSFT) and Carl Icahn made another formal, non-negotiable offer on Friday night to buy Yahoo’s search assets (without releasing details) and gave the company 24 hours to accept or reject it. Yahoo (YHOO) rejected it. Yahoo also blasted Microsoft for its erratic behaviour and “suggested” that Microsoft just buy the whole company for $33 or more. Based on Yahoo’s description of the deal, this was the appropriate response.
Details of the proposal and Yahoo’s full statement below. But first:
In our opinion, this was not a serious offer. We think it was designed simply to give Microsoft and Icahn more to complain about in the weeks leading up to the shareholder meeting.
The latest offer apparently represented an “improvement” on the search deal that Yahoo rejected a few weeks ago, the one that would result in Yahoo’s search assets being sold to Microsoft. Because Microsoft did not release details, however, we have no way of knowing how much of an “improvement” it was. The 24-hour deadline and the “non-negotiable” condition, meanwhile, seems designed to give Yahoo no choice but to reject the deal.
Why would Microsoft and Carl Icahn want to make an offer that they knew would be immediately (and publicly) rejected by Yahoo?
- To quiet Yahoo shareholders like us who are complaining that Microsoft and Icahn are long on rhetoric and short on specifics.
- To be able to say “see, we’re reasonable–we raised our offer, and Yahoo still immediately rejected it. Yet more reason you should throw management under the bus.”
- To be able to show that Yahoo management refuses to entertain reasonable offers from Microsoft, and therefore needs to be removed.
Unless the details of the offer were significantly better than Yahoo describes, we would not have voted to support such a deal. We agree wholeheartedly with Yahoo management that decapitating the company at the shareholder meeting with no clear operating plan in place would be a mistake, and we still don’t like the idea of breaking the company up. So, as of today, we are still planning to vote against the Carl Icahn-Microsoft slate.
Yahoo statement (and our comments in blue) below:
Yahoo! Rejects Microsoft/Icahn Search and Restructuring Proposal
Saturday July 12, 11:08 pm ET
Yahoo! Suggests Microsoft Make A Proposal To Acquire Whole CompanySUNNYVALE, Calif.–(BUSINESS WIRE)–Yahoo! Inc. (Nasdaq:YHOO – News), a leading global Internet company, confirmed today that it has rejected a joint proposal from Microsoft Corporation and Carl Icahn for a complex restructuring of Yahoo! that would include the acquisition of Yahoo!’s search business by Microsoft.
The proposal was made on Friday evening and Yahoo! was given less than 24 hours to accept the proposal, the fundamental terms of which Microsoft and Mr. Icahn made clear they were unwilling to negotiate. After reviewing the proposal with its legal and financial advisers, Yahoo!’s Board of Directors determined that accepting the proposal is not in the best interests of its stockholders.
The Board’s rejection of the proposal was based on a number of factors, including the following:
1. Yahoo!’s existing business plus its recently signed commercial agreement with Google has superior financial value and less complexity and risk than the Microsoft/Icahn proposal.
Microsoft might dispute this, but until we get details of the offer, we have no way of knowing. We suspect that if Microsoft really thought the details were better than the Google deal, it would have released them publicly.
2. The Microsoft/Icahn proposal would preclude a potential sale of all of Yahoo! for a full and fair price, including a control premium.
3. The major component of the overall value per share asserted by Microsoft/Icahn would be in Yahoo!’s remaining non-search businesses which would be overseen by Mr. Icahn’s slate of directors, which has virtually no working knowledge of Yahoo!’s businesses.
Also a major problem. Until we hear Carl Icahn’s specific proposals for how to run Yahoo better than current Yahoo management is running it, we’re not firing current management.
4. The Microsoft/Icahn proposal would require the immediate replacement of the current Board and removal of the top management team at Yahoo!. The Yahoo! Board believes these moves would destabilize Yahoo! for the up to the one year it would take to gain regulatory approval for this deal.
We’re fine sending the board and management packing. But not until we have a clear alternative to replace them with and a new operating plan. Yahoo’s current plan is sound. The company just needs to do a better job of executing it. The company can’t afford a six-month purgatory period where a whole new management team comes in, is brought up to speed, and figures out what to do next.
Roy Bostock, Chairman of Yahoo! said, “This odd and opportunistic alliance of Microsoft and Carl Icahn has anything but the interests of Yahoo!’s stockholders in mind. Clearly, Microsoft, having failed to advance in search, is aligning with the short-term objectives of Mr. Icahn to coerce Yahoo! into selling its core strategic search assets on terms that are highly advantageous to Microsoft, but disadvantageous to Yahoo! stockholders. Yahoo’s Board of Directors will not allow that to happen. Yahoo!’s Board remains open to any transaction that delivers full value to our stockholders – we just do not believe such a transaction should be dictated by Microsoft and a single short-term investor.”
Mr. Bostock continued, “After negotiating among themselves without the involvement of Yahoo!, Carl Icahn and Microsoft presented us with a ‘take it or leave it’ proposal under which we would be required to restructure the Company, hand over to Microsoft Yahoo!’s valuable search business and to Carl Icahn the rest of the Company, giving us less than 24 hours to respond. It is ludicrous to think that our Board could accept such a proposal. While this type of erratic and unpredictable behaviour is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders.”
Agreed: It is ludicrous. Which means Icahn and Microsoft expected Yahoo to reject it. Which means they were hoping to gain something else by making it: Leverage for the shareholder meeting.
Mr. Bostock also noted that Microsoft’s position that it would not deal with, or otherwise engage with, Yahoo!’s management to reach agreement on this proposal or to implement it, is completely absurd and irresponsible given the complexity of the deal – one that requires the removal of half of Yahoo!’s business from Yahoo! and then the integration of it into Microsoft.
Also absurd–yet more evidence that Microsoft and Icahn aren’t making a serious proposal.
Yahoo!’s Board points out that a transaction to acquire the whole company would be much more straightforward and involve far less risk than the new proposal or any similar alternative. The Board believes a whole company transaction could be negotiated and executed prior to August 1st. In rejecting the Microsoft/Icahn proposal, Yahoo! not only repeated its offer to sell the entire Company to Microsoft for at least $33 per share, but also offered to negotiate an improved search only transaction. Microsoft rejected both offers.
Won’t happen, but an offer in the high $20s could. And that would be a lot tougher for shareholders to reject.
Ironically, Carl Icahn, who jointly with Microsoft developed and presented this proposal, had previously urged Yahoo! not to sell its search business to Microsoft. Specifically, in an interview on CNBC’s Fast Money program, on June 4, 2008, Mr. Icahn said, “… it’s crazy for this company now to do this alternative deal and give the store away, because obviously, an alternative deal is a poison pill because once you’ve done an alternative deal and given the search to Microsoft, you don’t need Microsoft to buy you anymore. So, that would be a poison pill….”
Significantly, the Board believes Microsoft and Mr. Icahn are overstating the value their search and restructuring proposal would deliver to Yahoo! stockholders and are substantially understating the risks. Yahoo! noted that a transaction that would separate the Company’s search and display businesses is an undertaking of great complexity. While the Board acknowledges that the current proposal contains a number of improvements over Microsoft’s earlier proposal, the Yahoo! Board’s conclusion that the current proposal is not in the best interests of stockholders is based on a number of factors, including:
- The revenue guarantees suggested, which are conditional and subject to reduction, are well below the search revenue that the Company is expected to generate on its own and in association with its announced commercial agreement with Google. That agreement alone is estimated to generate $250 to $450 million of incremental cash flow for the first twelve months following implementation, while allowing Yahoo! to remain a principal in paid search;
- The success of the remaining Company is critically dependent on Microsoft’s ability to effectively monetise search;
- Microsoft/Icahn’s proposed Traffic Acquisition Costs rates are below market;
- The proposal calls for Yahoo! to sell its industry-leading algorithmic search business and its related strategic and valuable intellectual property portfolio for no incremental consideration; and
- Many of the components of the headline value that Mr. Icahn and Microsoft put forward, such as the spin-off of the Yahoo!’s Asian assets and the return of cash to stockholders, are steps that could be taken by Yahoo! on its own and the Board continues to evaluate these options.
Mr. Bostock concluded, “Microsoft and Mr. Icahn are trying to dismantle the Company and deliver our search business to Microsoft on terms that would be disadvantageous to Yahoo! stockholders. We are prepared to let our stockholders, not Microsoft and Carl Icahn, decide what is in their best interests and we look forward to the upcoming vote.”