Microsoft Calls Yahoo Rejection "Unfortunate," Pursues Hostile Takeover

Microsoft plans to take its bid for Yahoo directly to shareholders

In the world of mergers, there are numerous levels of "hostility" which characterize bids. There are unilateral talks, mutually agreed upon, which are typically labeled as more germane, even if one company ends up absorbing the other.

Then there are unsolicited bids, such as Microsoft's initial offer to Yahoo, which are often labeled as "partially hostile". On the far end of the spectrum are "fully hostile" bids, in which one company tries to bypass another company’s executive and board leadership by offering a buyout directly to shareholders. Among the famous examples of takeovers considered "hostile" was the HP and Compaq merger, which passed by a meager 51% margin in a shareholder vote.

Having been rejected by Yahoo's board, Microsoft commented that it was "unfair" that Yahoo did not embrace its "full and fair proposal to combine" the companies. Now, Microsoft indicates it is planning to bypass the board and take the issue directly to a shareholder vote. Microsoft states, "We are offering shareholders superior value and the opportunity to participate in the upside of the combined company. The combination also offers an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market."

Microsoft's statement continues, "The Yahoo! response does not change our belief in the strategic and financial merits of our proposal. As we have said previously, Microsoft 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."

The decision by Microsoft to pursue a fully hostile takeover is truly a sign of the times at Yahoo. Yahoo despite promising big changes continues to lose ground to Google in search engine market share, which in turn leads to sinking advertising profits. The company dismissed 1,000 employees recently. Yahoo aggressively acquired companies throughout last year, but its investments left it with little to show for it.

The hostile bid by Microsoft may nix a future board-arranged merger with Yahoo, but at this point it may be a moot issue. If Microsoft has to, it can simply wait out the company until it falls further towards its demise, though it would prefer a quick merger while the company still has some vitality.

Yahoo has a lot to offer Microsoft. Despite its dropping search engine share, Yahoo still represents a significant portion of the market and a major market name. An alliance with Microsoft could establish a strong competitor to Google. Further, Yahoo has a wealth of intellectual property, domain names, and other assets that could come in handy to an ever-evolving Microsoft.

The board is left to ponder Microsoft's words, and their significant decision -- as it may be their last.