Tuesday, May 6, 2008

Micro..hoo: A New Twist

This new development on the international M&A front is worth briefly noting on this blog.

We had all expected to see a highly-contested battle for control of Yahoo! panning out over the next few months. A hostile bid by Microsoft was keenly on the cards. But, it all ended last weekend turning out to be a damp squib, with CEO Steve Ballmer announcing Microsoft intention of withdrawing from the deal in a letter to Yahoo! CEO Jerry Yang. The main reason cited in the letter is Yahoo’s threat to outsource search to Google, which deterred Microsoft from launching a hostile bid.

There are differing viewpoints held by some about why Microsoft may have adopted such a strategy rather than move ahead aggressively with a hostile bid on Yahoo! Others even argue that this episode hardly denotes the end of the takeover saga – it is only a ploy by Microsoft to beat the share price of Yahoo! down (and also incite indignant shareholders to initiate action against the Yahoo! board) and thereby enhance its negotiating leverage on the deal. Overall, from a legal standpoint, it appears that challenges to Microsoft withdrawal or even to Yahoo’s uncompromising stand (that led to the withdrawal) in courts in the US are not likely to be sustained based on past precedent. Following are links to some of the discussion on this issue.

1. BusinessAssociations Blog discusses the effectiveness of a defense used by Yahoo! to ward off a hostile bid threat by Microsoft. This relates to the use of a strategic partnership (in this case with Google) as a takeover defense – perhaps as some sort of a “poison pill”.

2. The Deal Professor suspects that Microsoft has had to withdraw due to a slow strategy it adopted thus far. He says:

“I’ve always thought that the problem with this strategy Microsoft has adopted thus far — slow and easy — is that it missed a maneuver from Larry Ellison’s tried-and-true playbook. In Larry’s world, you launch your full hostile as soon as possible in order to begin the time-clock running on your required antitrust regulatory clearances. Thus, when the target (Peoplesoft, etc.) finally agrees to negotiate provided you raise your bid, you don’t have to worry about closing risk. By that time, you’ve already obtained the necessary antitrust and other regulatory clearances. You put a few more dollars on the table and close in the next few weeks.

Microsoft has not followed this route. Thus, in any negotiation with Yahoo now, Yahoo has bargaining leverage to demand a “hell or high water” provision which would require Microsoft to make assets dispositions, license technology or other actions to satisfy the demands of antitrust regulators. Remember, Microsoft has never been on the good side of regulators – the Department of Justice would love to have the benefit of this provision.”
3. Ideoblog offers some thoughts including the possibility of success (or otherwise) of any shareholder suits against Yahoo! in connection with the failure of Micorsoft’s takeover attempt, and consequent fall in price of Yahoo! shares. Larry Ribstein, the author of the blog says:

“First, would the suit against Yahoo’s “poison pill” work? I doubt it. Time is on Yahoo's side – it was still negotiating to increase shareholder value and had not sold control.

Second, if Yahoo stock does take a beating and Ballmer does come back, could he and MS be sued for securities fraud – making a deliberately false threat to produce this result? Possibly under 14(e) and 10b-5, but very hard to prove.”
4. Finally, this also gives rise to some corporate governance issues. For instance, Yahoo! shareholders may possibly contend that the board did not act in the interest of the shareholders by placing undue resistance to the Microsoft bid that resulted in its failure, and that Yahoo’s actions were driven by sentimental reasons (to preserve the positions of the incumbents, such as the founder). Even here, it may be a difficult case for shareholders challenging the actions as Yahoo! was always ready to complete a deal, but at a higher price.
(Update – May 7, 2008: Law.com credits Yahoo’s lawyers with a clever strategy they used to ward off Microsoft’s maneuvers)

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