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Yahoo says Microsoft offer still 'undervalues' company

Redmond's acquisition offer "substantially undervalues" Yahoo, according to a new letter from Yahoo's top management to Microsoft CEO Steve Ballmer.

Mike Ricciuti Staff writer, CNET News
Mike Ricciuti joined CNET in 1996. He is now CNET News' Boston-based executive editor and east coast bureau chief, serving as department editor for business technology and software covered by CNET News, Reviews, and Download.com. E-mail Mike.
Mike Ricciuti
4 min read

Updated from the top Monday 6:10 AM PDT by Dawn Kawamoto, who also added a short update note at the bottom at 2:30 PM PDT.

Yahoo on Monday responded to Microsoft's merger deadline, reiterating its rejection to the software giant's unsolicited buyout bid as "substantially" undervaluing the company.

"As a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal," Yahoo CEO Jerry Yang and Chairman Roy Bostock wrote in a letter to Microsoft CEO Steve Ballmer.

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Microsoft launched an unsolicited bid for Yahoo on February 1 in a deal initially valued at $31 a share. But Yahoo rejected that offer as undervaluing the company.

On Saturday, Microsoft issued an ultimatum to Yahoo, giving the Internet search pioneer three weeks to enter formal merger negotiations and conclude a deal. In Monday's letter, Yang and Bostock rebutted Ballmer's claim that Yahoo has refused to enter negotiations, citing meetings the two companies have had in recent weeks.

Jerry Yang, Yahoo's CEO Yahoo

"Steve, you personally attended two of these meetings and could have advanced discussions in any way you saw fit," they added in response to Microsoft's claim that Yahoo has refused to enter negotiations.

Yahoo's board of directors met on Sunday to review Microsoft's ultimatum to close the deal within three weeks, according to a report in the Financial Times.

Yahoo: Reflect our true value
In its letter to Microsoft on Monday, Yahoo highlighted its global brand, recent sizable investments in its advertising platform, growth prospects, and its "strategic benefit to Microsoft," in justifying a higher bid.

"Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders," the letter states.

Yahoo said its recent road show to outline its three-year financial plan to investors received "positive feedback from our stockholders." The company went on to note that it had strengthened its view that it's worth more as a standalone company than Microsoft's current bid.

More importantly, Yahoo stated that investors representing a "significant portion" of its shares have indicated to the company that Microsoft's offer substantially undervalues Yahoo.

Microsoft CEO Steve Ballmer CNET Networks

But while Yahoo investors may want more money from Microsoft, it's unclear whether that would translate into a re-election of Yahoo's current directors, or if investors would support an opposition slate put forth by Microsoft in a proxy fight.

Over the weekend, Microsoft threatened to launch a proxy fight and to take its offer directly to Yahoo investors in an exchange offer. A proxy fight would entail Microsoft seeking to get an opposition slate of directors elected at Yahoo's next annual shareholders meeting, for which no date has yet been set. Should Microsoft's slate prevail, the new board would likely vote on the issue to remove Yahoo's antitakeover measure, otherwise known as a "poison pill." Without a poison pill, Microsoft would be able to tender the shares Yahoo's investors committed to the software giant as part of its exchange offer.

One major institutional investor said over the weekend that he had previously informed Yahoo's independent directors that he may consider voting for a new board of directors, if the parties did not move forward in a deal.

In its Monday letter, however, Yahoo said: "We are confident that our stockholders understand that our independent board is best positioned to objectively and knowledgeably evaluate our company's alternatives and to maximize value."

Antitrust concerns
Yahoo also highlighted its concern about a potentially rigorous antitrust review, both domestically and overseas, should it agree to a deal.

"As a follow up to a recent meeting among our respective legal advisors we had on this topic, and at your request, we provided to you on March 28, a list of additional information we would need to further our understanding of the regulatory issues associated with any transaction. To date, you have still not provided any of the requested information," Yahoo's letter states.

Yahoo said that an antitrust review could drag out and disrupt its operations, only to end with regulators nixing the deal. According to sources, shortly after Microsoft issued its unsolicited bid two months ago, Yahoo had begun inquiring into the antitrust ramifications and the likelihood that such a deal could get passed.

Microsoft, meanwhile, could be hearing the clock ticking on the waning months of the Bush administration and feeling pressure to wrap up the regulatory process. The process can take anywhere from six to eight months to review, said one former high-level antitrust attorney with the Department of Justice who is now in private practice.

Under the Bush administration, Microsoft's antitrust situation has been far less dicey than it has been with the European Commission. In February, the Commission slapped Microsoft with a $1.35 billion fine for failing to comply with its previous antitrust sanctions.

Yahoo, in closing its Monday note, said it wants Microsoft to provide "certainty of value and certainty of closing."

Update, 2:30 PM:
Microsoft is also working to keep its troops up-to-date as the heat intensifies between the two companies.

Kevin Johnson, president of Microsoft's platforms and services division, sent an e-mail to his employees Saturday, to inform them of the ultimatum Ballmer was issuing that day to Yahoo:

"I wanted to make you aware that we sent the attached letter to the Yahoo! Board of Directors today. We will not be commenting publicly or internally on the letter as we believe the letter speaks for itself. I will continue to keep you updated as events warrant. Thank you for your continued focus on our innovation roadmap and business objectives."

Throughout the takeover effort, Yahoo's Yang has made a habit of sending reassuring e-mails to the troops at his company.