War of Words Continues Between Microsoft, Yahoo

Ballmer Makes a Merger Ultimatum, Yang Calls Hardline Stance 'Curious'

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NEW YORK (AdAge.com) -- Microsoft is no longer playing nice.
Steve Ballmer
Steve Ballmer Credit: Nancy Kaszerman

In a stern April 5 letter to the Yahoo board of directors, Microsoft CEO Steve Ballmer said it will give Yahoo three weeks to conclude a friendly deal to merge the two companies -- or it will cut the bid's value and take the case directly to shareholders.

Mr. Ballmer acknowledged that Yahoo has been seeking alternative merger partners with "others in the industry" but that Microsoft remains Yahoo's only viable option.

"While there has been some limited interaction between management of our two companies, there has been no meaningful negotiation to conclude an agreement," he wrote.

He threatened that if Microsoft doesn't reach a deal with Yahoo in three weeks, Yahoo's board of directors will have to defend their seats as the Redmond, Wash.-based software giant will initiate a proxy contest to elect an alternative slate of directors.

Additionally, Mr. Ballmer indicated that an unfriendly buyout would not be worth the premium a friendly offer is, and that economic conditions and internet usage trends have already undercut Yahoo's value.

"If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal," Mr. Ballmer wrote.

Still, Yahoo is not budging. It fired off a letter to Microsoft early this morning, maintaining that Microsoft's current $31-a-share offer to acquire Yahoo continues to undervalue the company and its assets. Yahoo's response also points out that Microsoft's shares have fallen since the combination cash-stock deal was initially proposed, meaning the offer has already lost value.

Yahoo said Microsoft's harsh letter "mischaracterizes the nature of our discussions," which Yahoo called "constructive conversations." The Yahoo letter said those conversations included integration and regulatory issues and even suggests it is not Yahoo, but Microsoft that is to blame for delays as it still hasn't provided information that Yahoo asked to receive to better understand the regulatory issues associated with any transaction.
Jerry Yang
Jerry Yang Credit: Paul Sakuma

"Your comment that we have refused to enter into negotiations to conclude an agreement are particularly curious given we have already rejected your initial proposal, nominally $31 per share at the time, for substantially undervaluing Yahoo! and your suggestions in your letter and the media that you are considering lowering the value of your proposal," wrote Yahoo CEO Jerry Yang and Chairman Roy Bostock. "Moreover, Steve, you personally attended two of these meetings and could have advanced discussions in any way you saw fit."

Microsoft announced Feb. 1 that it would offer $31 a share to acquire Yahoo, a 62% premium over Yahoo's then share price. Yahoo's closing price Friday was $28.36, although its shares dropped 3% on after-hours trading on a Reuters report that suggested Microsoft was rethinking its offer. The two companies have met over the past couple months but have not had a serious negotiation.

Microsoft is betting on Yahoo to help it close the search advertising gap between Microsoft and Google and bolster the software giant's online ad audience. While the two combined would still vastly trail Google in search share, Google itself hasn't been immune to economic worries. Since February 1, Google's stock price has fallen 8.7%.
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