Updated July 13 at 8:43 a.m. PDT, with more details about offer.
Yahoo announced Saturday night that it rejected a joint-buyout proposal that Microsoft and investor activist Carl Icahn offered the night before, which called for a "complex restructuring" and sale of Yahoo's search business to Microsoft.
The joint proposal, issued Friday night, gave Yahoo a 24-hour turnaround to accept or reject the renewed offer. It called for Microsoft to buy the search business and Yahoo to swap out its board members for Icahn's dissident slate, who would then have control in running the remainder of Yahoo's businesses.
Microsoft did not have an immediate comment Sunday morning.
Yahoo's board, after consulting with its legal and financial advisers, rejected the offer Saturday night based on a number of factors, including:
Yahoo's existing business plus its recently signed commercial agreement with Google has superior financial value and less complexity and risk than the Microsoft/Icahn proposal.
The Microsoft/Icahn proposal would preclude a potential sale of all of Yahoo for a full and fair price, including a control premium.
The major component of the overall value per share asserted by Microsoft/Icahn would be in Yahoo's remaining non-search businesses which would be overseen by Mr. Icahn's slate of directors, which has virtually no working knowledge of Yahoo's businesses.
The Microsoft/Icahn proposal would require the immediate replacement of the current Board and removal of the top management team at Yahoo. The Yahoo Board believes these moves would destabilize Yahoo for the up to the one year it would take to gain regulatory approval for this deal.
Yahoo said in rejecting the offer it told Microsoft it was willing to sell the entire company for at least $33 a share and its board believed such a deal could be negotiated and executed before its annual shareholders meeting on August 1. Yahoo said it also informed the software giant it remained willing to negotiate an "improved search only transaction."
Microsoft, however, rejected both offers, Yahoo stated.
Yahoo did not disclose the financial terms that Microsoft and Icahn were willing to offer in the proposal.
Icahn, which is running a proxy fight against the Internet search pioneer to unseat its board at its annual shareholders meeting, delivered the proposal to the search pioneer.
And although Yahoo's board "acknowledges that the current proposal contains a number of improvements over Microsoft's earlier proposal," the Yahoo board's believed this latest proposal is not in its shareholders best interests. It cited these issues:
The revenue guarantees suggested, which are conditional and subject to reduction, are well below the search revenue that the company is expected to generate on its own and in association with its announced commercial agreement with Google. That agreement alone is estimated to generate $250 to $450 million of incremental cash flow for the first twelve months following implementation, while allowing Yahoo to remain a principal in paid search.
The success of the remaining company is critically dependent on Microsoft's ability to effectively monetize search.
Microsoft/Icahn's proposed Traffic Acquisition Costs rates are below market.
The proposal calls for Yahoo to sell its industry-leading algorithmic search business and its related strategic and valuable intellectual property portfolio for no incremental consideration.
Many of the components of the headline value that Mr. Icahn and Microsoft put forward, such as the spin-off of the Yahoo's Asian assets and the return of cash to stockholders, are steps that could be taken by Yahoo on its own and the board continues to evaluate these options.
Yahoo Chairman Roy Bostock characterized the efforts by Microsoft and Icahn as "erratic and unpredictable" and said that it would be "absurd and irresponsible" for the Internet search company to engage in a complex deal that would remove half of its business and do it without Microsoft dealing directly with the company's management.
"Microsoft and Mr. Icahn are trying to dismantle the company and deliver our search business to Microsoft on terms that would be disadvantageous to Yahoo stockholders. We are prepared to let our stockholders, not Microsoft and Carl Icahn, decide what is in their best interests and we look forward to the upcoming (shareholders) vote," Bostock said.
According to a report in The Wall Street Journal, Microsoft initiated discussions with Yahoo:
The proposal came together in recent days. Microsoft's general counsel Brad Smith initiated the talks with a phone call to Ron Olson, the lawyer for Yahoo's independent directors a few days ago, according to a person familiar with the matter. Subsequently, Microsoft CEO Steve Ballmer, Mr. Icahn and Roy Bostock, Yahoo's chairman, discussed the proposal over several phone calls, this person said.
That move apparently came despite a statement by Microsoft on Monday that it "concluded" it could not reach agreement with Yahoo's board and it would be interested in discussing either a search only acquisition, or purchase of all of Yahoo, with a new board.
And on Friday evening, according to a report in The New York Times, Icahn and Ballmer made their proposal. The Times further notes Yahoo's board and advisers discussed it in a meeting that lasted between four to five hours.
Microsoft's sweetened search buyout offer, a concept CNET News first reported on three weeks ago that the software giant was considering, showed improvements over its initial search offer to Yahoo that was worth $9 billion.
One improvement, according the Wall Street Journal, included revenue guarantees that would span five years, compared with its previous offer of three years.