Microsoft to adopt proxy battle in Yahoo bid

Microsoft to adopt proxy battle in Yahoo bid

But the flip side is that such a hostile approach by Microsoft could lead to an exodus of Yahoo talent to Google or other Web rivals

Daisuke Wakabayashi

Wednesday, February 20, 2008

SEATTLE, USA: Microsoft Corp will authorize a proxy battle for Yahoo Inc this week to convince the Web company's shareholders to agree on a takeover deal that the Yahoo board so far has rejected, the New York Times' DealBook blog said on Tuesday.

Quoting people briefed on the matter, the Times Web site said Microsoft, which has been expected to raise its cash-and-stock bid originally worth $44.6 billion, would seek to nominate a slate of directors by March 13, if Yahoo's board did not enter talks.

A Microsoft spokesman said the company had always maintained that it reserves the right to exercise all options but declined to comment specifically on the DealBook report.

A Yahoo spokeswoman declined to comment, saying it does not respond to rumor or speculation.

A person familiar with the matter told Reuters a proxy fight would cost about $20 million to $30 million, but the source was not aware of Microsoft making the decision to pursue the fight.

"Microsoft is doing the smart thing. It's giving both the carrot and the stick," said Morningstar analyst Toan Tran. "The carrot was the big premium on Yahoo stock and now the stick is the threat of a proxy fight."

Proxy fights waged by corporations to facilitate a hostile acquisition are rare and represent less than 5 per cent of all proxy fights since 2001, according to data from research firm FactSet SharkWatch.

Microsoft Chairman Bill Gates told Reuters on Monday that there was "nothing new" in the Yahoo takeover process.

"We've sent our letter and we've reinforced that we consider that it's a very fair offer," he said.

The two companies are at a stand-off in Microsoft's unsolicited bid to acquire Yahoo. Microsoft has offered to buy Yahoo for $31 a share in cash and stock, a bid which Yahoo's board rejected, saying it undervalued the company.

Microsoft countered by saying its offer was "full and fair," but did not say what it planned to do next. The deal is now worth $41.6 billion due to a decline in Microsoft's stock value.

The fees for paying lawyers and solicitation firms to wage a proxy fight are a fraction of what it would cost Microsoft to raise its offer.

For every dollar the offer is increased, it would cost Microsoft an additional $1.4 billion.

Proxy fight

If Microsoft decides to launch a proxy fight, it would nominate a slate of directors to take control of Yahoo's board and support the company's proposal.

The nominees would be voted on at Yahoo's annual shareholder meeting in June.

A Yahoo-Microsoft proxy fight would be the largest corporate proxy fight in the eight years FactSet SharkWatch has been tracking statistics on this, it said.
Microsoft would also risk alienating Yahoo's rank-and-file by taking a hostile tactic.

Unlike manufacturing companies with fixed assets, a key Yahoo asset is its engineering talent, and a hostile approach by Microsoft could lead to an exodus of Yahoo talent to Google Inc or other Web rivals.

Later on Tuesday, Yahoo announced that it had put in place severance benefits that would be given to all employees who might be laid off if the company was sold.

In a securities filing, Yahoo said if an employee is dismissed without good reason within two years of change of control in the company, employees would continue to receive their annual base salary and certain benefits for at least four months and up to 24 months depending on their position.

"It's just public posturing," said Brenon Daly, an analyst at the 451 Group.

A company targeted for acquisition will often provide "golden parachutes" to take care of their employees when the company is in play, according to Daly.

Microsoft has said it can wring out $1 billion in cost savings and revenue benefits from the Yahoo acquisition.

Analysts expect some of the savings to come from a reduction in overlapping areas between the two companies.

Microsoft shares fell 14 cents, or 0.5 percent, to close at $28.17 on the Nasdaq. The stock is down 14 percent since the offer for Yahoo went public.

Yahoo shed 65 cents, or 2.2 percent, to $29.01. The value of Microsoft's cash-and-stock offer now stands at $28.90.

©Reuters