Professor Bainbridge...on law, politics, religion, culture & food

Microsoft Withdraws Yahoo Bid

Over at my law blog, I note that Microsoft has withdrawn its offer to buy Yahoo and point out one of the interesting legal issues this bid raised.

In his letter withdrawing the bid, Microsoft CEO Steve Ballmer observed that:

I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table.

It’ll be interesting to see how Yahoo’s largest shareholders react. We know that lots of major Yahoo shareholders are also Microsoft shareholders:

According to RiskMetrics, 90 percent of all Yahoo institutional investors also own shares in Microsoft. And of this group, 15 of the top 20 Yahoo institutional investors own more Microsoft than Yahoo.

These investors know that they have to assess takeover deals based not on the premium target shareholders will receive, but on the net effect on both target and acquirer shares. They also know that acquiring company stocks often suffer post-acquisition. So they wanted a deal, but not one that required Microsoft to overpay. In addition, press reports suggest that some of Microsoft’s largest shareholders were pressuring the firm not to overpay. In that regard, note that Ballmer’s letter also says that:

In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.

This will add some fuel to the fire. Recently “one major institutional investor for Yahoo ... told CNET News.com ... that he previously told Yahoo’s independent directors he might support an opposition slate, if the search company does not move forward with a deal.”

I suspect that Yahoo’s going to have real problems with a substantial percentage of their shareholders over this fight.