Yahoo Rejects Microsoft, Wants More Money

Microsoft loses bid for Yahoo and must choose between a fully hostile bid, a higher offer, or waiting for Yahoo to fall further on hard times

The Microsoft-Yahoo saga, which played out over the last couple weeks, began with Microsoft making an unsolicited offer for internet giant Yahoo. The plot thickened with the resignation of Chairman Terry Semel from Yahoo's board, and a Google threat of legal action to block the move. While many analysts considered the deal a shoe-in, initial analysis of Yahoo's willingness to accept the deal in the first place was apparently off the mark.

Inside sources had warned that CEO Jerry Yang, who held considerable sway over the final decision had been very wary of Yahoo getting digested into the Microsoft empire. These sources had called such a development "Jerry's worst nightmare." Perhaps they should have been heeded sooner.

In a move which had been forecast since late last week, Yahoo's board on Monday formally rejected Microsoft's $45B bid. The rejection made it clear that the board felt that anything less than double its stock price would be too little. Yahoo would accept an offer of $40 per share or higher, significantly more than Microsoft's offer, which equated to about $31 per share.

The statement from Yahoo's board, attacked Microsoft's offer as cheap, stating, "The board believes that Microsoft's proposal substantially undervalues Yahoo, including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments."

This contrasts Microsoft Chief Executive Steve Ballmer's valuation of the Yahoo, in which he called his company's bid "generous."

The board made it clear that its ears would be open to a higher bid from Microsoft or other investors, stating that Yahoo "is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment."

Yahoo struggles are evidenced by significant layoffs and a 2008 forecast that many in the investment community considered disappointing. Some see Yahoo's move and simply a gutsy attempt to try to get Microsoft to up its offer. One thing that may stand in the way of this, though, is lack of competitive interest. After Google's criticism, it is unlikely that Google would field a bid, and it might not be able to even do so, due to possible violations of antitrust laws stemming from a Yahoo-Google merger. Fox owner Rupert Murdoch, known for buying up properties, has also stated that he has no interest in Yahoo.

As no one else has showed much interest in struggling Yahoo, Microsoft may feel little need to rush, and may alternatively choose to sit back and wait like a vulture circling a tired beast, ready to strike when Yahoo's circumstances make it more willing to deal.

Another possibility that remains is that Microsoft could make a fully hostile bid and bring its offer directly to Yahoo's shareholders, attempting to outmaneuver the board. Such a move might work, but would risk seriously damaging its future prospects, if it was rebuffed.

Yahoo rejected a Microsoft bid in 2006 and 2007 in private talks, but this offer was Microsoft's first public bid; and also its first public rejection. Microsoft refused to comment, so its next move is anyone's guess. Microsoft, though, had previously made it clear that it considered the move an essential step for both companies, stating, "Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers and publishers."

With the prospect of such an alliance evaporating almost as quickly as it was born, the news is surely a disappointment to Microsoft's leadership.