Yahoo Calls Microsoft Out on Bid Ultimatum

Responding to an ultimatum Microsoft (NASDAQ: MSFT) CEO Steve Ballmer sent over the weekend calling on Yahoo (NASDAQ: YHOO) to come to the bargaining table, Yahoo responded today with its own letter, reiterating its position that the initial offer undervalues the company’s worth in light of its global brand value and prospects for future growth.

“Our board’s view of your proposal has not changed,” CEO Jerry Yang and Chairman Roy Bostock wrote in the letter. “We continue to believe that your proposal is not in the best interests of Yahoo and our shareholders.”

In his letter, Ballmer said that if Yahoo continued to stonewall, he would initiate a proxy contest to replace the board of directors, and warned that such a contingency could reduce the ultimate settling price.

“We consider your threat to commence an unsolicited offer and proxy contest to displace our independent baord members to be counterproductve and inconsistent with your stated objective of a friendly transaction,” Yang and Bostock wrote.

These two salvos came following a lull in the high drama that has characterized the fallout from the initial bid of Jan. 31. If consummated, the merger would dramatically reshape the competitive landscape of the Internet economy, creating a powerful force in Web content and display advertising, and, Microsoft hopes, a viable No. 2 behind runaway market leader Google (NASDAQ: GOOG) in search advertising.

In defending Yahoo’s holdout, Bostock and Yang cited the flurry of product announcements the company has made recently as a signal that it is undertaking a transformation strategy that will restore value to the company. Earlier today, it offered details about AMP, the streamlined advertising management platform that it plans to launch in the third quarter.

In other recent moves, Yahoo has opened its search, e-mail and mobile products to developers, embraced the Semantic Web and OpenSocial initiatives.

IDC analyst Karsten Weide said that with this broad-ranging push toward open innovation, Yahoo has been making a strong case that it can turn its fortunes around, but it remains to be seen how patient the shareholders will be.

Something Cool at Yahoo

“They’re trying to impress on their shareholders that it might be worth their while to hold out,” Weide told “It’s almost like they’re getting their mojo back. There’s definitely something cool going on at Yahoo.”

Part of the problem is that Microsoft’s bid of $31 a share represented a 62 percent premium to Yahoo’s stock price at the time. Yahoo’s stock soared on news of the bid, and it has been unable to broker an alternative deal that would give it a valuation as high as Microsoft’s offer.

Ballmer wrote in his letter that the two companies had met, but that no substantive negotiations had taken place. In the meantime, he said, the economic picture has darkened, particularly for Internet companies.

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Bostock and Yang took issue with both comments. “We regret to say that your letter mischaracterizes the nature of our discussions with you. We have had constructive conversations together regarding a variety of topics, including integration and regulatory issues,” they wrote.

On the second point, they noted that Yahoo recently reaffirmed that it is on target to meet the revenue numbers that it offered as guidance for both the first quarter and the full year.

Regardless of what they might think personally, Bostock and Yang are duty-bound to maximize value for their shareholders, and today’s letter acknowledged that responsibility.

“We are open to all alternatives that maximize shareholder value. To be clear, this includes a transaction with Microsoft if it represents a price that fully recognizes the value of Yahoo,” they wrote. “Lastly, we are steadfast in our commitment to choosing a path that maximizes stockholder value and we will not allow you or anyone else to acquire the company for anything less than its full value.”

Despite Microsoft’s assurance that it would not raise its bid, that remains the likely scenario in the minds of many analysts.

A higher bid coming?

Citigroup analysts Mark Mahaney and Brent Thill put out a research note today setting a target for Yahoo of $34 a share, where it expects the deal will ultimately be reached.

“A letter like that is designed to intimidate people,” Weide said of Ballmer’s communiqué. “For all their thunder, I still think they’re going to increase their offer at some point.”

But Youssef Squali at Jeffries & Co. took Microsoft’s letter a little more seriously, setting a target for Yahoo at the initial offer of $31, pointing out that Yahoo’s only real alternative would be to go it alone, which would likely bounce its stock down to the low twenties or high teens.

In the meantime, Yahoo can be expected to make more product announcements leading up to the shareholders meeting June 12. Weide believes that Microsoft has every intention of pressing forward with the nomination of a slate of dissident directors, and continuing to lobby Yahoo’s institutional shareholders to support its acquisition bid.

“It all comes down to whether investors believe that Yahoo can turn it around,” Weide said.

So the dance continues.

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