• by Tanya Gazdik , February 11, 2008

Yahoo's Board of Directors, which met on Friday, have deemed Microsoft's unsolicited $44.6 billion acquisition offer as too low, according to several news reports citing unnamed sources. Among the Microsoft thwarting scenarios proffered over the weekend were the resumption of merger talks with AOL, or a tie-up with Google or Walt Disney Co.

The $31 per share offer undervalues Yahoo, The Wall Street Journal and The New York Times reported, each quoting a person familiar with the deal. The board also felt the price doesn't take into account the risk in entering into an agreement that could later be voided by regulators.

According to the Journal, Yahoo's board intends to send Microsoft a letter today, detailing its position. Neither Microsoft nor Yahoo is commenting on the reports of the rejection.

Yahoo has "poison pill" provisions that could prevent any hostile takeover, and Microsoft would probably have to get rid of the company's current board to get past them. Yahoo's board appears to be betting that Microsoft doesn't want to "go hostile." Yahoo is still considering a Google partnership as a means of fending Microsoft off.

It's not clear what the company will do next. But these are some of its options, according to Todd Bishop, a reporter with the Seattle Post-Intelligencer who writes a blog about Microsoft.

Another bid: Microsoft could treat Yahoo's rejection as a negotiating tactic, an effort to induce a larger bid, Bishop wrote. The $40-per-share reference made by the Journal's source could lead to that conclusion. Microsoft would then need to decide whether it wants to boost its offer beyond the original $31 per share, which was a 60 percent premium over Yahoo's previous closing price.

Tender offer: Microsoft's original bid was limited to a public expression of interest and proposed terms -- a "bear hug," as it's known in the mergers and acquisitions trade. That left it to the Yahoo board to decide how to proceed. With the offer rejected, Microsoft could go further and launch a formal hostile bid, making a direct tender offer to buy shares from Yahoo's shareholders, according to Bishop. However, Yahoo could use a "poison pill" defense mechanism to thwart such an attempt.

Board maneuver: Microsoft could nominate its own slate of directors for the Yahoo board, to push the deal through, Bishop wrote. Microsoft CEO Steve Ballmer may have been hinting at this possibility in his Jan. 31 letter to the Yahoo board, saying that the company "reserves the right to pursue all necessary steps to ensure that Yahoo!'s shareholders are provided with the opportunity to realize the value inherent in our proposal." Yahoo's latest proxy statement set March 14 as the deadline for shareholders to nominate directors.

Matt Rosoff, industry analyst at Kirkland, Wash.-based research firm Directions on Microsoft told Bishop Microsoft "probably expected this move. They hit the ball over the net once and now they're going to hit it back again. It's going to go back and forth a few times."

The rejection of the unsolicited bid, now worth $42 billion, as too low is the first clear signal the board might be prepared to negotiate and sell the Internet media giant, Reuters reported. If completed, a merger of Microsoft and Yahoo would be the world's largest of two computer technology companies and create a formidable rival to Internet search and advertising leader Google Inc., according to Reuters.

Yahoo's "rejection" of Microsoft's $31 bid isn't a rejection but a counteroffer of $40 a share, according to Henry Blodget of the Silicon Alley Insider.

"It remains to be seen whether the company will state this explicitly in its letter to Microsoft (unlikely), but it has already sent the message through The Wall Street Journal. So the next question is...how will Microsoft respond," Blodget wrote. "The answer likely depends on how impatient Steve Ballmer is. Microsoft is in a strong position. No other bidders for Yahoo have emerged, and none are likely to. Yahoo has now indicated that it won't refuse to sell the company--thus forcing Microsoft to decide whether to pursue a hostile takeover--and many Yahoo shareholders have gone on record saying that they like the $31 deal (although they'd no doubt like a $40 one better)."

There are some risks to Microsoft's biding its time, Blodget wrote. No other bidders have emerged, but given enough time, Yahoo might be able to put some kind of alternative deal together. Yahoo has already used the two newspapers to suggest that it has an alternative--outsourcing search to Google--but this isn't really an alternative and Microsoft probably won't be fooled by it, he wrote. One other issue that makes time a factor: Yahoo may deteriorate as an asset if a prolonged period of purgatory causes its best people to leave. Microsoft can't start locking up executives until it gets a commitment, and in the meantime, many executives may exit.