Yahoo! Courts AOL In Bid To Make Microsoft Jealous

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Yahoo! Courts AOL In Bid To Make Microsoft Jealous

The board of directors at Yahoo, have not taken very kindly to Microsoft’s unsolicited takeover bid of $45 billion or approximately $31 per share, which they feel is too low. In an attempt to shield themselves from Microsoft, Yahoo! executives have reportedly revived merger talks with AOL Times Warner.

Jerry Yang, co-founder of Yahoo! stated in an official letter that Microsoft’s offer of $31 per share “massively undervalues” Yahoo! and they will not consider any negotiations unless the price goes up to at least $40 per share, or an additional $12 billion.

Yahoo! will however have to reassure its share holders, that they can bring the stock prices back up, which will not be easy to do by themselves, given that their balance sheet has shown a fall in profits over the last two years and they continue to lose market share to Google.

In the past AOL and Yahoo! have failed to reach a mutually acceptable deal. However, given the crises both companies are facing (Time Warner are rumoured to be on the lookout for a buyer for AOL), one might think they may be able to settle their differences and work together amicably. However, the reality of the situation is plainly obvious to most – Yahoo! is desperate and trying everything possible to avoid a takeover or get Microsoft to bump up their offer.

A Yahoo! – AOL merger seems highly unlikely. Both the companies are struggling, they do not supplement each others’ shortcomings, and bringing them together will most probably accelerate their decline. Among other reasons, Yahoo! does not have sufficient cash to entice already debt-ridden Time Warner. Also, Google, which has a 5% stake in AOL would resist such a deal, as Yahoo! would then replace Google’s paid search partnership with AOL. And most importantly, Yahoo! would still have to compete with Google, with no additional armour to arrest its fall.

Most analysts believe that with time the Yahoo! Microsoft deal will eventually happen. Talking to AOL is probably just Yahoo!’s way of making execs at Microsoft envious and get them to raise their bid. Microsoft would be wise to just wait this out, allow shareholders to voice their opinions, and when the stocks fall back down, buy Yahoo! in a hostile take over. Others believe that Microsoft should actually pay up right now, in order to make some quick and decisive moves to stem Google’s growth.

The Wall Street Journal reports, “Microsoft’s management is conscious of the risk that a hostile bid could spark resentment among Yahoo’s rank-and-file engineers and other employees whose cooperation is crucial to the company’s success.” However, in his original letter to Yahoo!, Microsoft CEO Steve Ballmer had clearly stated, “Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo’s shareholders are provided with the opportunity to realize the value inherent in our proposal.”

Update:

Since the time this post was authored, Microsoft have responded to Yahoo!’s rejection of their bid, calling it “unfortunate” and clearly indicated that they will not back down and are ready to take more drastic steps to acquire the company.