In the ruthless world of mega-corporate mergers, few events have been more drawn out or drama-filled than that between Microsoft (NASDAQGS: MSFT) and Yahoo! (NASDAQGS: YHOO). Our story begins in May of 2006 with an unconfirmed press report that Microsoft was considering purchasing a stake in Yahoo! in the first of many steps to stem the tide of Google. Such a merger was favorably looked upon, allowing Yahoo! to maintain its “buy” valuation with many stock analysts and securities firms. This came on the heels of an October 2005 announcement that Y! IM and MSN Messenger would be interoperable. Analysts and investors hoped that the momentum would carry, but talks had all but fizzled.
Merger talk heated up again a year later in the spring of 2007 when published reports spoke of another union between the web giants. Sources close to the alleged discussions indicated that the talks were serious, while both Microsoft and Yahoo! declined to comment on them. The 2006 merger rumors enhanced Yahoo!’s stock value, but such talks were met with much more apprehension this time around. A late-April stock surge of 10% had died away by the beginning of May as analysts began to evaluate the positions of the firms.
Senior Analyst at eMarketer David Hallerman indicated that the cultures of Yahoo! and Microsoft were incompatible. “There’s too much overlap between Microsoft and Yahoo!, and to try to merge the company cultures of two large companies like that in general is hard,” he posed. Other analysts had similar conclusions, indicating that Microsoft/Yahoo! competition had lead to both companies offering similar solutions, services and software; a merger would merely have duplicated assets such as email and IM. As the weeks moved on, discussions seemed to evaporate just as they had in 2006.
We now fast forward to 2008 where the story begins for most and heats up in earnest. Yahoo!’s fourth quarter earnings painted a scary picture of the company’s future. Profits fell from $269 million USD to $206 million USD. This occurred amidst a revenue increase of $113 million to $1.83 billion USD. Yahoo!’s yearly profits sank $90 million to $660 million and prompted Yahoo! to announce that it would trim 7% of its 14,300 jobs, or approximately 1000 people. After the announcements, Yahoo! CEO Jerry Yang said it was a pivotal time for Yahoo! with a “unique window of opportunity…to make the necessary, game-changing investments.”
Smelling blood in the water, Microsoft announced an unsolicited takeover bid of $44.6 billion in cash and stocks on February 1, 2008. The offer was contained in a letter to Yahoo!’s board and offered 62% more than the price of Yahoo!’s combined shares. Investigative calls to Microsoft yielded disclosure that the bid was once again placed to consolidate a market that was rapidly being dominated by Google. Microsoft’s Kevin Johnson noted that, “Today the market [for online search and advertising] is increasingly dominated by one player.”
It was revealed in the letter that Yahoo! had previously declined Microsoft’s merger talks in 2007, citing a reorganization that was to reinvigorate an ailing Yahoo!. In the letter, Microsoft succinctly stated that, “a year has gone by, and the competitive situation has not improved.” The document also revealed that the offer could be received by shareholders in cash or stocks. The offer sent shareholders into a frenzy, raising Yahoo!’s shares by a stunning 48%; the boost in value reversed the crushing 46% loss Yahoo! endured between October 2007 and January 2008.
For Microsoft to finance the cash half of their $44.6 billion offer, they would liquidate their reserve of $21.3 billion and take on loans to cover the remaining $1.3 billion. The maneuver — a stark departure from Microsoft’s typical fiscal protocol — was received warmly by analysts. Analysts felt that having two major players in the search and advertising market would improve the prospects for venture capitalists seeking a return on their investments. Venture capitalists seek to profit from investing when the start-up is sold to a larger firm, and Microsoft’s move to bolster the competition in this space would mean more profit for everyone.
Microsoft’s bold strategy had three immediate effects on Yahoo!: It triggered the resignation of Yahoo! Chairman Terry Semel who was intensely opposed to the previous merger talks in 2007. It also prompted Yahoo! to consult with Google to ward off Microsoft’s advance. It was theorized that the board was loosely in favor of the offer — particularly after Semel’s departure — but sources close to Yahoo! stated that a Microsoft takeover was “Jerry’s worst nightmare.” While discussions with Google were under way, Yahoo! was also courting News Corp for a lucrative deal to mutually increase profits without mentioning the scary “takeover” word.
Just ten days after the news of Microsoft’s offer broke, Yahoo! resolved to decline the offer in a shareholder press release. The release cited Yahoo!’s “global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments” as reasons why Microsoft’s “proposal substantially undervalues Yahoo!”.
On February 13, Detroit shareholders in the Wayne County Employee’s Retirement System of Michigan filed suit, contending that Yahoo! failed to consider the interests of their shareholders when evaluating Microsoft’s offer. The suit joined another from Nashville which sought to rebuke Yahoo! for their quiet dismissal of Microsoft’s 2007 offer.
Wall Street was not kind to a Microsoft that could not close the deal; a falling stock weakened the half of their bid to be paid in shares. Frustrated with the sluggishness of the process, Steve Ballmer moved forward with hostility. An April 5 letter to Yahoo! spoke in clear terms: “If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors.”
In response to Microsoft’s posturing, Yahoo! announced on April 7 that they were not against the acquisition, but were simply seeking a superior offer. Yahoo! further stated that Microsoft’s aggressive stance was having a harmful effect on the likelihood of a friendly merger. From there, Yahoo! went mum until early May.
During a meeting between Ballmer and Yang on May 3, Microsoft raised their offer by additional $5 billion USD to $33 per share, while Yahoo! raised the stake to a minimum of $37. Convinced that the merger was a financial improbability for Microsoft, Ballmer was prompted to announce that Microsoft had rescinded their offer to take Yahoo!. At this time, Microsoft also revealed that it had abandoned its plans to engage in a hostile bid, noting the “approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Speaking to Yahoo!, the letter continued to say that, “Our [Microsoft’s] discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.”
After the May 3 meeting, a member of the Microsoft team expressed concern regarding Yahoo!’s stance in the matter. It was remarked that, “they [Yahoo!] are going to burn the furniture if we go hostile. They are going to destroy the place.” The rescinding letter also expressed similar concerns, hinting to a “poison pill.” It is a tack sometimes taken by companies being acquired against their will; it combines various strategies to put a tremendous financial burden on the acquiring firm. Such strategies include lavish severance packages for all employees, significantly increased benefits and other uncommon amenities. When the acquiring firm finally wrests control of its target, any changes that defy the vision of the board would trigger the penalties. Such a maneuver allows a company to effectively freeze its business in time to retain assets and employees.
As the first day of trading after Microsoft’s retraction opened on Monday, May 5, Yahoo!’s stock suffered a 13% dip to whittle away another $6 billion in market capitalization. This precipitous decline caused billionaire buy-out king Carl Icahn to quietly amass 490,000 options worth 49 million shares on May 14.
Breaking almost three weeks of silence, Carl Icahn stepped forth on June 4 to play his hand in a scathing public letter that lambasted Yahoo!’s Jerry Yang and the board for treating Yahoo! shareholders with neglect. The letter contained accusations that Yahoo! had not worked in favor of shareholders when considering the offer and had instead colluded to keep their power. In response, Yahoo! released a public letter on June 5 which claimed that Icahn had seriously misrepresented and manipulated the facts regarding the events between Yahoo! and Microsoft.
Just a few days later on June 12, Yahoo! reaffirmed that it had ended all discussions with Microsoft concerning the purchase of any or all of the company. That same weekend, Yahoo! also announced that it had formed a strategic alliance with Google. Curiously, the alignment with Google realized one of the concerns presented in Ballmer’s May 3 letter. Significantly, Microsoft was worried that a Google-Yahoo! alliance would undermine Yahoo!’s “Panama” initiative to increase their ad presence. Yahoo! did indeed allow Google advertisements to have a place in Yahoo! search results, eliminating valuable ad real estate from their portfolio.
On July 7 Microsoft moved to support the outspoken Icahn to endorse his shareholder rebellion. The support represented the first time Microsoft had even acknowledged Icahn’s deliberate maneuvering and reignited Microsoft’s desire to purchase Yahoo!. The new pairing hoped that combined efforts would persuade shareholders to elect a more amicable board on the August 1 shareholder meeting.
The most recent news in the ongoing events comes on July 21 with the revelation that Yahoo! would expand its board to eleven members, granting Icahn and two of his own appointees membership. The remaining eight candidates would be eligible for reelection. While this change has quieted Icahn and given Microsoft pause, the continuing struggle is far from over. A statement from Icahn on the eve of the Icahn-Yahoo! agreement is particularly revealing.
“I continue to believe that the sale of the whole Company or the sale of its Search business in the right transaction must be given full consideration,” he said.
As the Microsoft-Yahoo! story comes to a temporary lull, it can be believed that the August 1 shareholder meeting will be significant in the future of Yahoo! as its own enterprise. There can be no doubt that Microsoft’s intense desire to protect themselves from Google will sustain this course events until someone clinches victory, as Pyrrhic as it might be.
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