What's behind Yahoo's rejection of Microsoft bid?

"Yahoo sees its own demise in a Microsoft acquisition."

Yahoo's rejection of Microsoft's acquisition bid is likely a negotiating strategy to elicit a higher offer and shouldn't be seen as an attempt to resist a deal at all costs, according to analysts.

Neither Microsoft nor Yahoo has many options to improve their position in online services and advertising, and combining forces is their best bet against common rival Google, analysts said.

"It's part of a larger negotiation that's occurring. Clearly, Yahoo should be and is seeking a higher bid, and this is part of that process," said Clayton Moran, a financial analyst with Stanford Group.

Yahoo is unlikely to find a company willing to bid as much as Microsoft for it, while Microsoft will not be able to attain its Internet goals by acquiring a company other than Yahoo. "While they need to negotiate and go through the process, at the end of the day this deal will happen," Moran said.

On Monday, Yahoo rejected Microsoft's bid, saying it undervalues the company. Microsoft offered to pay US$31 for half of Yahoo's outstanding shares and 0.9509 of a Microsoft share for the other half. At the time of the offer, Microsoft's stock stood at US$32.60 and the bid was valued at US$44.6 billion, a 62 percent premium over Yahoo's stock price at the time. However, the bid's value has dropped with Microsoft's sliding stock price, which at press time was US$28.10. At the same time, Yahoo's stock price has risen from a close of US$19.18 on the day before the bid to US$29.75 at press time.

Moran predicted that Microsoft will adjust its offer so that it ends up at US$35 per share, probably increasing the fixed cash portion and reducing the variable stock portion so that value is less vulnerable to Microsoft stock fluctuations. A US$35-per-share offer would be a midpoint between the original bid and the US$40 per share Yahoo is reportedly seeking.

"We continue to view a Yahoo sale to Microsoft as the most likely outcome," Citigroup financial analysts wrote in a note published Sunday after press reports over the weekend that Yahoo would reject the Microsoft bid. The rejection isn't surprising, but rather consistent with Yahoo's board job to "extract maximum value" for shareholders, the Citigroup analysts wrote.

Yahoo has reportedly held talks with Google and AOL to explore alternatives to a Microsoft acquisition. One scenario being floated would be for Yahoo to outsource its search advertising business to Google, while another, reported Monday by The Times of London, has Yahoo and Time Warner's AOL discussing a possible merger.

However, neither option would match the potential benefits of an acquisition by Microsoft, Moran said. "A combined Yahoo-AOL wouldn't be particularly strong, and Yahoo's stock wouldn't react favorably to that deal," Moran said. A search partnership with Google would boost Yahoo's revenue but it wouldn't address larger problems within the company, he said.

For Moran, if Yahoo has approached AOL, it has done so probably to send a message to Microsoft that it has other options and that Microsoft has to sweeten its offer. Meanwhile, Google's intervention is probably directed at complicating and lengthening the negotiation process between Microsoft and Yahoo, and thus delaying the formation of a stronger rival, Moran said.

While merging with AOL is unlikely to give Yahoo the boost it needs, such a deal would probably be more palatable to Yahoo's management, because Yahoo would be the strongest party in the fusion, according to industry analyst Greg Sterling of Sterling Market Intelligence.

"Yahoo sees its own demise in a Microsoft acquisition. My sense is that Yahoo's management believes that Yahoo's soul wouldn't survive as part of Microsoft," Sterling said.

At this point, the situation is very complicated for both Microsoft and Yahoo. If Yahoo is intent on fending off Microsoft's advances at all costs, Microsoft could opt to walk away empty-handed and face a public embarrassment, or attempt a hostile takeover, which could alienate and scare away Yahoo employees it would want to retain, Sterling said.

At the same time, Yahoo can't simply wave away a generous Microsoft offer if it doesn't have an alternative to it, Sterling said. "There is a great deal at stake for both sides, and it's very complicated," he said.

Microsoft declined to comment about Yahoo's rejection. AOL didn't immediately reply to a request for comment about its reported merger talks with Yahoo.

Join the newsletter!

Error: Please check your email address.
Rocket to Success - Your 10 Tips for Smarter ERP System Selection
Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Juan Carlos Perez

IDG News Service
Show Comments

Most Popular Reviews

Latest Articles

Resources

PCW Evaluation Team

Ben Ramsden

Sharp PN-40TC1 Huddle Board

Brainstorming, innovation, problem solving, and negotiation have all become much more productive and valuable if people can easily collaborate in real time with minimal friction.

Sarah Ieroianni

Brother QL-820NWB Professional Label Printer

The print quality also does not disappoint, it’s clear, bold, doesn’t smudge and the text is perfectly sized.

Ratchada Dunn

Sharp PN-40TC1 Huddle Board

The Huddle Board’s built in program; Sharp Touch Viewing software allows us to easily manipulate and edit our documents (jpegs and PDFs) all at the same time on the dashboard.

George Khoury

Sharp PN-40TC1 Huddle Board

The biggest perks for me would be that it comes with easy to use and comprehensive programs that make the collaboration process a whole lot more intuitive and organic

David Coyle

Brother PocketJet PJ-773 A4 Portable Thermal Printer

I rate the printer as a 5 out of 5 stars as it has been able to fit seamlessly into my busy and mobile lifestyle.

Kurt Hegetschweiler

Brother PocketJet PJ-773 A4 Portable Thermal Printer

It’s perfect for mobile workers. Just take it out — it’s small enough to sit anywhere — turn it on, load a sheet of paper, and start printing.

Featured Content

Latest Jobs

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?