by David Shabelman
[Posted on February 11, 2008 - 5:47 PM]
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DiggAfter Yahoo! Inc. on Monday rejected a $44.6 billion bid from Microsoft Corp., investors were left to ponder if the move, along with chatter that Yahoo! is exploring a merger with AOL LLC, is a hard-nosed effort to repel the offer or a negotiating ploy aimed at spurring the software maker to up the ante.
Yahoo!'s stock price rose modestly higher on Monday as shareholders digested the company's formal statement that Microsoft's proposed $31 a share acquisition offer "substantially undervalues" the Sunnyvale, Calif., company. Although market analysts have speculated that Microsoft could eventually pay $35 a share, and perhaps go as high as $40, investors remain cautious as they wait to hear from Microsoft and because Yahoo! may choose to remain independent or seek another deal.
One possible alternative floated late Sunday was that Yahoo! could acquire AOL LLC, Time Warner Inc.'s Internet subsidiary. The Times of London first published the rumor, though some saw it as a negotiating tactic rather than a viable alternative.
"Yahoo!'s desperate," said Tom Taulli, founder of DealProfiles.com, an online service that tracks mergers and acquisitions. "They're looking at all their options and seeing what the possibilities are, and the only thing they can hope for is a 'stalking horse' or 'white knight,' and I don't think that's out there. Talk of combining with AOL complicates things and may be a way to boost the price tag of the deal."
Adam Lehman, former senior vice president of America Online, said the prospects of an AOL-Yahoo! combination could provide Yahoo!'s board with a meaningful alternative to Microsoft's offer to present to shareholders, but he questioned the strategic benefits of such a deal. "At an operational level, it doesn't seem as compelling in that you've got two stagnant businesses, reminding me of the story of the two drunks trying to hold each other up at the bar," he said. "I don't think there's a clear and compelling vision for how the combination of the assets would drive better results for either."
AOL also would amount to a pricey acquisition for Yahoo! In 2005, Google Inc. invested $1 billion in AOL in exchange for a 5% stake, valuing the company at $20 billion. Yahoo! has cash reserves of $2 billion, so it would need to include a substantial amount of stock to acquire all of AOL. Such a transaction might not be acceptable to Time Warner, which is looking to pay down $37.1 billion in debt. Acquiring only AOL's online advertising and digital media assets, and not its dial-up Internet access business, would reduce the purchase price.
Other roadblocks also might scuttle a tie-up of Yahoo! and AOL. As part of its investment in AOL, Google provides search results on the company's Web properties, a valuable asset it would not relinquish easily even if the transaction thwarted Microsoft.
Lehman, however, said a deal could be struck that allows Google to continue to provide search for AOL.
In a research report, Sanford C. Bernstein & Co. LLC analyst Jeffrey Lindsay said Monday if Yahoo! management "is prepared to put up a determined fight," it could get Microsoft to improve its terms, or even force the company to back off its pursuit.
"Although we do not necessarily agree that $31 per share is a low bid for Yahoo!, we think that Yahoo! management can make a case that the assets are potentially worth $37 if it outsources paid search to Google, and up to $40 if Yahoo! can acquire AOL's advertising and content assets on reasonable terms," he said. "The challenge for Yahoo!'s management team is to come up with a convincing enough story that shareholders will accept it in preference to Microsoft's cash and equity offer."
Yet some Yahoo! shareholders believe the time for major operational changes has passed, and lack confidence that the company's management could successfully incorporate a large company such as AOL. Eric Jackson, who last year led a small group of Yahoo! shareholders in pressing for the resignation of CEO Terry Semel, is again trying to rally company stockholders who favor an acquisition. While conceding that Yahoo!'s move to rebuff Microsoft's offer may be a ploy, Jackson worried that Yahoo! is determined to remain independent.
"I'm fearful ... that the board of directors and management think they can go it alone," he said.
Ashkan Karbasfrooshan, a Yahoo! shareholder and president of technology industry blog WatchMojo.com, said Yahoo!'s rejection of Microsoft's offer and its expressing interest in other deals is an effort to gain leverage for deal talks with the software giant. "You're at the midpoint of negotiations," he said. "But Yahoo! doesn't want it to get messy, and Microsoft doesn't want it to get messy. I would be surprised if Microsoft would go for $40 a share, but maybe $35 or $36."
Karbasfrooshan also said that with so many institutional shareholders owning both Microsoft and Yahoo! stock, the Redmond, Wash., software company faces pressure to keep a lid on the offer price for fear that its shares would suffer if a deal were too expensive. Microsoft shares are down 14% since it made the offer for Yahoo! on Feb. 1.
Goldman, Sachs & Co., Lehman Brothers Inc. and Moelis & Co. are financial advisers to Yahoo!.
Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal adviser, and Munger, Tolles & Olson LLP is counsel to Yahoo!'s outside directors.
