Microsoft Taking Yahoo Bid to Shareholders?

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Press reports and sources close to Microsoft are reporting the the Redmond software giant is getting ready to authorize a proxy battle which would take its $31/share bid for Internet company Yahoo directly to the company’s shareholders. Microsoft has hired Innisfree M&A, a proxy solicitation company, to assist with its efforts to take over Yahoo.

A proxy battle would work like this: Yahoo is controlled by a ten-member board of directors, all of whom are up for re-election this year. Microsoft would propose its own slate of candidates for the board positions—these candidates would naturally be pre-disposed towards approving Microsoft’s buyout offer—and will try to persuade Yahoo’s biggest investors that backing Microsoft’s slate of directors is the easiest and fastest way for them to reap the rewards of their investment in Yahoo.

Microsoft would have until March 14 to formally nominate its board candidates. The effort could cost Redmond as much as $30 million dollars, but that’s inexpensive compared to raising the price of its offer to Yahoo. When Microsoft offered $31 a share for Yahoo, the deal was worth about $44.6 billion; shifts in stock prices make it worth about $40 billion today, but raising that offer to $32 a share would cost Microsoft an additional $1.3 billion.

Yahoo has formally snubbed Microsoft’s unsolicited takeover offer, but reports have some of Yahoo’s largest investors holding out for a higher price. Microsoft has so far shown no signs it may be willing to raise it’s offer.

Another tactic Microsoft could employ in its efforts to take over Yahoo would be to appeal to Yahoo investors to sell their shares to Microsoft directly. This sort of hostile takeover action would aim at giving Microsoft a significant (if not majority) share of Yahoo, and thereby a larger influence on Yahoo’s corporate governance. However, a hostile takeover would lead to bad blood on both sides of the company, making it even more difficult to integrate the businesses in the event of a takeover.

In the meantime, Yahoo has adopted new severance packages for its employees that are designed to keep Yahoo employees with the company even if Microsoft takes over, and would make moving Yahoo employees and executives to Redmond more difficult if a merger were t go through. In email to employees last week, Yahoo CEO Jerry Yang said the severance changes ""shouldn’t be construed as any indication that a change in control might or might not take place."


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