Sunday, February 10, 2008

Ballmer ponders next move in Yahoo fight

Steve Ballmer, Microsoft's chief executive, may well have thought that he had landed a knock-out blow with his opening takeover offer for Yahoo, putting an initial 62 per cent premium on the struggling internet company.
If so, then the letter that lands on his desk today will make him think again. Yahoo has decided to fight - though whether it is fighting for its own independence, or just to get a higher price out of Microsoft, was a matter of debate among onlookers over the weekend.
The letter spurning his offer will take the Microsoft CEO even further into uncharted waters as he ponders his next move.
Though it has mounted a string of acquisitions of smaller companies, Microsoft for years rejected the blandishments of investment bankers who argued it should consider a big deal.
Now Mr Ballmer must contemplate a move that even CEOs with considerable experience in the takeover market think twice about: mounting an all-out hostile bid, with the risk not only of rejection, but that he will cause damage to the target company and tie up the attention of his own senior management for months.
If Mr Ballmer is seeking inspiration for his next step, he might look to the example of rival software boss Larry Ellison, who has virtually written the textbook on how to pull off unsolicited takeovers in the software industry.
Oracle's capture last month of BEA Systems was being held up by technology bankers last week as the closest recent Silicon Valley parallel to the Yahoo bid.
By going public with an offer to buy the company, Mr Ellison forced BEA into a desperate hunt for "white knights" to save the company before it eventually started secret talks that led to an agreed deal with Oracle at a higher price.
Mr Ellison made it clear that he was prepared to take his fight to shareholders if need be.
For Mr Ballmer, though, that decision will come much faster: if he wants to try to replace Yahoo's directors with Microsoft's own nominees at this year's annual meeting he has little more than a month to act, leaving little time for public posturing and private negotiating to bring this to a more amicable end.
A number of similarities - and differences - with the BEA situation point to the issues that are likely to determine Microsoft's moves in the coming weeks. The first is that BEA's directors had a shareholder agitator in the shape of Carl Icahn pushing them publicly to sell the company. Yahoo's biggest shareholders - Capital Research and Legg Mason - have yet to take a public stance over the Microsoft bid, though rumours have been heavy that they have both told the internet company it should make sure it does not let the massive premium implied in Microsoft's bid slip away.
A representative from Capital Research met with Mr Ballmer last week, according to one person familiar with the meeting. With big stakes in both companies, however, Capital Research is interested in more than simply seeing Yahoo attract the biggest possible premium, and it is not clear how it would feel about Microsoft raising the value of its offer.
A second comparison with BEA is the hunt for white knights or other alternatives to fend off an unwanted takeover. In BEA's case, no one else stepped forward - in part because of the low odds of competing successfully against Oracle. With the ability to reap big cost-savings by rationalising overlapping businesses, and with the financial might to see off rival bidders, Oracle was a daunting adversary.
Similar considerations apply in the Microsoft case. No other acquirer could reap the $1bn of cost savings Microsoft has said is possible, making it hard to justify paying more.
That leaves a possible search advertising alliance with Google as the most likely alternative, though regulators may well baulk at a deal that leaves Google in an even more dominant position in the most important part of the online advertising market.
A final question for Yahoo would be whether, in the absence of a strong alternative, it can find other ways to Microsoft to pay more. One person close to Microsoft said that companies in such situations generally do not "bid against themselves", particularly if the opening shot was at such a premium. However, Microsoft has acknowledged publicly that it sets a high store on being able to complete a deal quickly.
"It's not clear whether they will blink or if they'll offer more," said Carl Tobias, a law professor at the University of Richmond. "They may just stand pat."
If so, then Yahoo's directors seem ready to dig in, and Silicon Valley is in for a bloody fight.

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