HolidayBuyer's Guide

FAQ: What's next for Microsoft's Yahoo bid?

Microsoft faces financial and legal hurdles in its unsolicited bid for Yahoo. CNET News.com walks you through the potential steps.

Microsoft faces several financial and legal hurdles on its way to wooing Yahoo to accept its $44.6 billion buyout bid.

Here's a brief FAQ explaining some of the reasoning behind Microsoft's actions Friday and what may be on the horizon for the two Google rivals in the near future.

Q: Why would a company go public with its interest in buying another company? Won't that just drive up the target company's stock and make it more expensive to buy that company?
Yes, it could drive up the target company's stock, but for an interested buyer, it's worth it if its previous repeated, private negotiations have failed. Oracle, for example, recently tried such a maneuver on BEA Systems.

By going public with its interest, rather than just giving up and going away, the interested buyer engages in what proxy solicitors call a "bear hug." For example, Microsoft's public disclosure of its interest to buy Yahoo at a 62 percent premium is designed to exert pressure on Yahoo's board to do a deal with the software giant, according to Morton Pierce, chairman of Dewey & LeBoeuf's mergers-and-acquisitions group in New York.

Q: Does this bear hug tactic often work with companies?
It depends. Typically, a public company issues a statement that its board will consider the offer and review whether it is in its shareholders' best long-term interest. Public companies have an obligation to engage in activities that are believed to be in the best interest of their owners.

Often, it takes a company several days before it issues a follow-up response to the bear hug. And in a number of cases, the company will decline the offer, citing prior private negotiations in which it had determined it was not in the interest of shareholders, proxy solicitors say.

Q: If they turn down the bear hug offer, then what happens?
A target company will often be under great pressure to do something to increase its value beyond what the prospective buyer offered. As a result, the prospective buyer will often make subsequent offers at a higher price. One proxy solicitor, who has been involved in a number of large unsolicited transactions, said he anticipates that Microsoft will make a higher offer.

The target company, however, may rebuff those buyout offers and instead announce other plans to enhance shareholder value, ranging from a stock buyback, the sale of some of its assets, or the hiring of an investment banker to explore other options, including a sale of the company.

Q: Why would the target company announce that it would consider selling itself when there is clearly an interested buyer--the one that engaged in doing the bear hug?
At this point, it is clear that the target company is "in play" for a prospective acquisition. As a result, any other suitors out there that were considering buying the company at one time will suddenly feel pressure to re-evaluate their interest and move swiftly, if they believe it still makes sense, investment bankers say. Other possible suitors may include MySpace.com parent News Corp., AOL parent Time Warner, and AT&T, an analyst with Credit Suisse said.

Q: If the bear hug fails to land a deal for the prospective buyer, what else can it do?
The prospective buyer can run a proxy fight or launch a tender offer. A proxy fight involves running a slate of opposition directors designed to replace some, or all, of the target company's current board at the next annual shareholder's meeting. The hostile bidder's goal would be to install a slate of directors who would be more favorable to selling the company to the interested buyer. In Yahoo's case, parties wishing to nominate their own directors to run against Yahoo's slate of 10 directors who will be up for election in 2008 are required to notify the company no earlier than February 13 and no later than March 14, according to Yahoo's filing with the Securities and Exchange Commission.

The hostile bidder could also launch a tender offer, which basically solicits all the shareholders of the target company, asking them to tender their shares to the interested buyer for a certain price. That price could be a set cash amount, a set number of shares, or a combination of cash and shares. This strategy circumvents the target company's board altogether and is a direct plea to the target company's shareholders. Back in 2003, Oracle launched a tender offer for PeopleSoft, but it eventually acquired the company in a friendly deal.

Q: Why doesn't a prospective buyer do either one of those things from the get-go, rather than a bear hug?
Proxy fights and tender offers involve very expensive and time-consuming processes. The bear hug, as a result, is often tried first.

Q: Are there any other hurdles a hostile bidder can face?
Any prospective buyer, whether through a hostile bid or friendly deal, has to convince the target company's shareholders to tender its shares to it, proxy solicitors say. When a prospective buyer meets with the target company's investors to explain the deal's benefits, that process is called a road show.

The road show not only serves as a forum for a prospective buyer to tout the benefits of a merger, but it also gives the prospective buyer feedback as to whether the price it is offering is enough to persuade investors to do the deal. And the prospective buyers will also need to convince their own shareholders that the company will benefit as a result of the transaction.

Microsoft, for example, said in its press conference on Friday that it expects there to be $1 billion in synergies as a result of a Yahoo merger, according to a research note by Stanford Group. But Microsoft also anticipates that a Yahoo merger would reduce its existing earnings forecast by 14 cents a share for fiscal 2009.

Other steps could include a target company adding a so-called poison pill to the mix, which would flood additional shares of the target company onto the market, should a potential buyer obtain a certain threshold level of shares, according to Pierce. (News.com publisher CNET Networks recently added a poison pill to ward off a change-in-control effort by a large investor group.)

And if a target company is concerned with a proxy fight, it could expand the number of directors who serve on its board.

Q: What about legal issues like antitrust?
Regardless of whether a deal is a hostile transaction, companies need to get clearance from antitrust regulators. And if the companies have a presence in Europe or other countries, the deal needs the antitrust approval of those regions as well.

Microsoft has already faced antitrust battles in the United States and, more recently, in Europe, over such issues as the bundling of its software and interoperability with competitors' products. A Microsoft-Yahoo merger would also likely get scrutiny here in the United States, as well as in Europe.

In Europe, for example, Google--the archrival of both Microsoft and Yahoo--is awaiting word from European antitrust regulators as to whether it will eventually approve its acquisition of DoubleClick. Stanford Group, as a result, expects that it could take several months for European regulators to sign off on a Microsoft-Yahoo merger.

CNET News.com's Ina Fried contributed to this report.

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