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Yahoo is expected to reject offer

Its board believes the bid is too low, a source says. Microsoft may raise the price.

February 10, 2008|Jessica Guynn | Times Staff Writer

SAN FRANCISCO — Yahoo Inc.'s board of directors plans to reject Microsoft Corp.'s week-old $44.6-billion takeover offer, a person familiar with the matter said Saturday, marking the latest move in a chess match over the future of the Internet pioneer.

The board plans to formally notify Microsoft in a letter Monday that it has determined that the $31-a-share bid takes advantage of a recent slump in the stock, fails to reflect the true value of the company and neglects to offset the risk to Yahoo if regulators overturn the merger, said the person, who is close to Yahoo management.

Sandeep Aggarwal, an analyst at investment firm Oppenheimer & Co., agreed. "The reward has to match the level of risk," he said.

Microsoft now must decide whether to sweeten its bid or pursue a hostile takeover.

Yahoo and Microsoft declined to comment Saturday.

Redmond, Wash.-based Microsoft has been prepared to raise its price if necessary, said a person who spoke with Chief Executive Steve Ballmer last week. Ballmer told this person that he wanted to get a deal done before administration changes in the U.S. and the European Union, which could make it more difficult to receive regulatory approval for big mergers.

"Obviously the million-dollar question is: Is this just a negotiating ploy or is it the real thing?" said Anthony Valencia, media and entertainment analyst at investment firm TCW Group in Los Angeles.

Despite investors' impatience with Yahoo, the bid might undervalue the Sunnyvale, Calif.-based company, Valencia said.

Moreover, the half-cash, half-stock bid has dropped in value to $29.08 a share because Microsoft's stock has tumbled since it made its offer public Feb. 1.

Analysts widely anticipated that Yahoo would attempt to wrest a higher bid from the world's largest software maker even though no other bidders have emerged.

They say Microsoft probably is willing to offer as much as $36 a share. That was reflected in Yahoo's stock price, which rose 16 cents to $29.20 on Friday, above the value of the offer. Yahoo shares traded as high as $31 as recently as November.

Yahoo is angling for as much as $40 a share, analysts say, an increase of about $12 billion to the offer. That might drive Microsoft's share price even lower.

"Bottom line, Microsoft will have to work a little harder and pay a little more, but at the end of the day, I am still convinced that this is a deal that happens," Standard & Poor's equity analyst Scott Kessler said.

Many senior executives at Yahoo believe a deal with Microsoft is inevitable, said a former executive who requested anonymity.

"I am pretty sure if they can get the offer up into the mid-30s, they'll take it," the person said.

The decision to reject Microsoft, which was first reported by the Wall Street Journal, came out of a Friday board meeting in which directors met by phone. They heard presentations from Yahoo's management and bankers, who contended that the company was worth more than what Microsoft bid. They also reviewed other options.

Microsoft is expected to try everything it can to avoid a hostile takeover that could increase the odds of regulators opposing the combination. Yahoo has "poison pill" anti-takeover provisions but not a staggered board. That means Microsoft could nominate its own slate of directors and try to oust the board to overturn the provisions.

"This is likely to be a long, drawn-out process," corporate governance expert Patrick McGurn said.

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jessica.guynn@latimes.com

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