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Yahoo's Severance Plans a Defense Against Microsoft?

It must seem like a long way to fall. Well, at least now there's a safety net.

Yahoo's board of directors has created an expansive severance package for all full-time employees who are either terminated without "cause" or leave on their own with "good reason" following a "change in control of the company."

The severance packages would extend regular compensation for a period of four months to two years, depending on the employee's job level. Employees would also receive continued health benefits, financial assistance for finding a new job (up to $15,000) and accelerated vesting of stock options.

The move comes as reports are circulating that Microsoft will go hostile in its acquisition bid, waging a proxy battle to replace Yahoo's board rather than raise its offer. The New York Times DealBook reported that Microsoft would authorize the effort to oust the board by the end of the week.

Microsoft has until March 14 to nominate candidates to the board, whose 10 members are all up for re-election this year.

The company has hired Innisfree M&A, a New York-based proxy solicitation company, presumably to advise or manage any campaign to oust the board, should Yahoo continue to hold out.

A Yahoo spokeswoman was unable to provide details on what would constitute "good reason" for an employee leaving voluntarily, therefore triggering the new severance package.

The vague language and the fact that the severance packages apply to the entire workforce invite speculation about just how large a worker defection Microsoft could face should it acquire the company.

[cob:Related_Articles]An alternate scenario would position the severance packages as a defensive move. It could add considerable expense to the acquisition if Microsoft wanted to do some housecleaning after taking over.

Depending on how broadly the severance agreements define "good reason," the move could be an attempt to push Microsoft into preserving existing working conditions at Yahoo, such as reporting structures or the projects employees are working on.

Analysts have already concluded that Microsoft will face a challenge in keeping loyal Yahoo employees from leaving if it takes over. If Microsoft goes hostile in its bid, Citigroup analyst Mark Mahaney has warned of an "exodus."

It would be difficult to integrate the workforces if things get ugly, and as a result the incumbent Yahoo talent views Microsoft as the enemy," said Richard Rafferty, a corporate and securities attorney and partner with the Texas-based firm of Strasburger and Price.

"Microsoft may have determined that it is willing to run that risk and may be planning to pursue the proxy fight in a way that does not alienate Yahoo's workforce," he added. "That's a tough task to accomplish."

By any interpretation, the severance packages must be seen as Yahoo's acknowledgement that the possibility of an acquisition is now very real.

Yahoo signed off on the severance packages in a filing with the Securities and Exchange Commission yesterday, following the board's approval of the measure on Feb. 12, the day after Microsoft signaled its intent to press forward with a public response to Yahoo's rejection.

Yahoo spurned Microsoft's initial offer of $31 per share, saying that it "substantially undervalues" the company based on its brand recognition, market share and growth prospects.

Microsoft retorted that its offer was fair, indicating that all options remained on the table as it pursued its bid. Earlier this week, Microsoft Chairman Bill Gates urged Yahoo to reconsider the original offer, comments that have widely been interpreted as signaling Microsoft's unwillingness to sweeten the deal.

[cob:Special_Report]Separately, on Feb. 11 Yahoo also began laying off workers as part of the "strategic workforce realignment" CEO Jerry Yang announced on last month's earnings call.

Apart from the bad blood a hostile takeover could create among the Yahoo talent pool Microsoft aims to acquire, a proxy battle makes sense as a game theory tactic, Rafferty said.

Microsoft would be unlikely to succeed in any attempt to place its candidates on the board, but such a move could bring Yahoo to the table in a weakened position, and drive down the final purchase price. With the added leverage of a proxy fight, Microsoft would still likely raise its bid (slightly), which would bring enormous pressure on Yahoo to accept, particularly if no other offer emerges.

"Proxy contests are typically very time consuming and typically very expensive, but given the scale of this transaction it's just a drop in the bucket to mount a proxy battle," Rafferty told InternetNews.com.

"The idea of raising the price just a dollar per share would cost Microsoft a lot more money than by mounting a proxy battle," Rafferty continued. "If they have to raise the price by 50 cents or a quarter or even a dime less because of this proxy battle, I think it's a pretty good technique."