After Rejection by Yahoo, Microsoft Hints at a Fight

Microsoft’s statement suggests that, at least for now, the company is not willing to raise its price. Microsoft also indicated anew that it was ready for a fight, repeating earlier statements that it might consider “all necessary steps” to ensure the deal is completed.Experts said Microsoft could ratchet up pressure on Yahoo’s board by taking its offer directly to shareholders and waging a proxy fight to oust Yahoo’s directors; it has until March 13 to nominate a new slate of directors.

Earlier in the day Yahoo said Microsoft’s bid “substantially undervalues Yahoo including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments.”

Yahoo said its board would “continue evaluating all of its strategic options.”

Microsoft initially offered to buy Yahoo for $44.6 billion, or $31 a share, in a mix of cash and stock. After a decline in Microsoft’s shares, the value of the offer now stands at less than $29 a share.

Yahoo’s board has explored other alternatives, including a search advertising partnership with Google, but has not received any competing acquisition offers, according to people briefed on its situation.

Absent such an offer or a deal that could persuade investors that Yahoo shares will go up significantly, the company’s best bargaining chip was the prospect of a friendly deal at a higher price, said Michael Klausner, a Stanford Law School professor who specializes in corporate law and corporate governance.

“Microsoft would much prefer a friendly deal, because it wants to retain good relationships with Yahoo executives and retain employees,” he said.

One Yahoo shareholder said the Microsoft and Yahoo statements represented the early stages of an expected negotiation.

“I think Microsoft has made it pretty clear that they are not about to back off here,” said Ryan Jacob, portfolio manager for the Jacob Internet Fund, which counts Yahoo among its top holdings. Mr. Jacob, whose fund has about $60 million in assets, said he favored a combination of Yahoo and Microsoft, as it would create a stronger competitor to Google. But he defended Yahoo’s initial rejection, saying the board was right to hold out for a higher offer.

Microsoft suggested that Yahoo shareholders it had polled viewed the deal favorably. “Based on conversations with stakeholders of both companies, we are confident that moving forward promptly to consummate a transaction is in the best interests of all parties,” Microsoft said. Many Yahoo shareholders are also Microsoft shareholders and might not necessarily favor a higher offer.

In a letter to employees explaining the company’s position on Monday, Jerry Yang, Yahoo’s chief executive, said they deserved credit for Yahoo’s success.

But some Yahoo employees will soon find out that their work is no longer needed. The company said last month that it would lay off about 1,000 employees by mid-February, though some would be allowed to apply for other jobs in the company. A person close to Yahoo said the layoffs could be announced as early as Tuesday.

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