Yahoo's second-largest shareholder says Microsoft will need to up ante

Legg Mason Capital Management weighs in on Redmond's quest to acquire Yahoo. Its assessment: Yahoo will be in a "tough spot" if it continues fighting for independence.

Yahoo's second-largest shareholder is offering this assessment of Microsoft's proposed acquisition: Microsoft will need to "enhance its offer" to complete the deal; Yahoo will be in a "tough spot" if it wants to remain independent.

That judgment was included in the latest Legg Mason Value Trust newsletter by Bill Miller, the chief investment officer of Legg Mason Capital Management, which holds more than 80 million Yahoo shares.

Although the newsletter was released one day before Yahoo issued its rejection to Microsoft's buyout bid and Microsoft responded to Yahoo's rejection letter, some of the comments appear to still be current.

"We think it will be hard for Yahoo to come up with alternatives that deliver more value than Microsoft will ultimately be willing to pay," Miller said in the newsletter.

And Miller characterized Microsoft as needing to do the deal. Said Miller: "We think this deal is a strategic imperative for Microsoft."

Since Microsoft floated out its unsolicited buyout bid of $44.6 billion on February 1, Legg Mason has had conversations with both Steve Ballmer, Microsoft's chief executive, and Jerry Yang, Yahoo's founder and chief executive.

"It has been reported that Microsoft has been discussing a combination with Yahoo for well over a year and that it had been prepared to pay over $40 per share previously," Miller stated in the newsletter, noting that his firm is not able to determine the accuracy of the reports. "Our own valuation work puts the value of Yahoo in the range of those reported numbers, though, and we think Microsoft will need to enhance its offer if it wants to complete a deal."

Time will tell.

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