Yahoo searches for more value

Microsoft threatens proxy battle as CEOs trade barbs

Yahoo and Microsoft have taken their merger negotiations to the court of public opinion.

In a weekend letter, Microsoft CEO Steve Ballmer threatened to launch a proxy battle in the software giant's effort to acquire Yahoo, and on Monday Yahoo struck back with a cantankerous response.

"Yahoo is worth well more as a stand-alone company than the value offered in your proposal, and would be even more valuable to Microsoft," Yahoo chairman Roy Bostock and CEO Jerry Yang wrote in a Monday letter to Ballmer.

Yahoo also criticized Microsoft for not providing information Yahoo needs in order to assess whether a Microsoft-Yahoo combination would pass regulatory muster.

In Saturday's letter, Ballmer gave Yahoo three weeks -- until after the Web firm's first-quarter earnings report, which Microsoft apparently hopes will show some weakness -- to accept its $41 billion offer or perhaps face negative consequences.

"If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective, which will be reflected in the terms of our proposal," he wrote.

When Microsoft first made its acquisition offer to Yahoo, it was worth $44.6 billion, but shares of Microsoft have drifted lower, a fact Yahoo pointed to in its response to Ballmer's letter.

Ballmer, on the other hand, noted in his letter that Yahoo's share of Internet search has fallen since Microsoft first made its offer Jan. 31 and that the economy overall has weakened, two developments that make Microsoft's offer more attractive now than then. "Our proposal is the only alternative put forward that offers your shareholders full and fair value for their shares," Ballmer wrote.

Taking into account the fluctuation in Microsoft's shares, the deal when first made valued Yahoo's shares at about $31 apiece, a 62% premium to where they were trading, whereas on Monday the offer was closer to $29 a share.

Shares of Yahoo closed down 2.3% on Monday at $27.70, making it a $37 billion company. Microsoft shares were flat at $29.16, which makes it a $271.4 billion company.

Jefferies & Co. analyst Youssef Squali told his clients Monday that Microsoft's hardball tactics likely will work because better offers from other suitors haven't materialized.

The prospect of Yahoo staying independent, he said, is "a scenario that makes shareholders shiver as it could cause the stock to drop precipitously."

The analyst said he expects that, if Yahoo shows a willingness to negotiate, it could extract a higher bid as Microsoft would save the time, effort and cost of a proxy fight.

He also noted that Microsoft's current offer is "towards the low end of where other Internet deals have been priced in the last three years."

One analyst predicted Monday that Yahoo eventually would sell for about $35 a share.
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