February 1 saw the announcement of a bid by Microsoft to purchase Yahoo for $44.6 billion. This effort would position Microsoft to compete directly with search firm Google for the first time. It would also combine the numbers two and three players in the search category, potentially out-stripping Google right out of the gate.
But there may be some small issues to overcome. On Jan. 29, a federal judge extended the duration of sanctions imposed on Microsoft by a 2002 consent decree agreement until November 2009. Those sanctions were originally due to expire in December.
From Ars Technica:
According to Judge Colleen Kollar-Kotelly, Microsoft failed to provide protocol specification documents to competitors as required by the consent decree agreement. The protocol documentation, which was supposed to be made available by February 2003, still hasn't been fully published by Microsoft.
Last year, the attorneys general of several states led by California authored a report in which they argued that Microsoft's continued dominance of the operating system market should be viewed as an indication that the constraints imposed by consent decree agreement failed to normalize competition. They called for a five year extension of the sanctions.
Given that there are current Department of Justice concerns over Microsoft's activities, it comes as no surprise that the DOJ is interested in reviewing this possible merger for antitrust issues. Analysts expect other enforcement agencies, including the European Union, will soon follow suit.
Of course, this news has also had an impact on the market. Yahoo shares jumped 46% to $27.98 but haven't topped $31, which indicates that the market doesn't expect a higher competing bid. Microsoft tumbled slightly to $30.75, down 5.7%, and Google is trading 8.6% lower at $515.89.
The thing that seems to be somewhat overlooked in all this is that Yahoo has yet to agree to the Microsoft overture. What appears to be an easy win for Microsoft could be refused by Yahoo. All Yahoo has said so far is that they would "evaluate the offer."
But industry analysts are questioning if Microsoft will make a bolder offer — or a hostile one. Calling the letter to Yahoo a "bear-hug letter," some analysts are wondering out loud if certain phrasing is indicative that Microsoft is willing to turn the take-over hostile.
From The New York Times:
Microsoft states in its letter that:
Depending on the nature of your response, 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.
So, what is Microsoft really getting at? What is the "bear" here?
Yahoo has a shareholders rights plan, also known as a poison pill, with a 15 percent trigger. As a result, Microsoft cannot effectively acquire an interest in Yahoo above that threshold unless it obtains prior approval from Yahoo's board.
But if the Yahoo board resists Microsoft's offer, Microsoft can still pursue a hostile bid.
In the face of an unaccommodating board, the only effective option for Microsoft to force Yahoo's directors to come to the negotiating table or to otherwise acquire Yahoo is a proxy contest.
Here, the timing of Microsoft's letter is not random. Section 2.5 of Yahoo's by-laws require that:
For proposals and nominations to be timely, a stockholder's notice shall be received by the secretary at the principal executive offices of the Corporation in the case of the annual meeting not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting of stockholders.
Yahoo's last annual meeting was on June 12, 2007. By my count, the notice date period therefore begins on Feb. 13, 2008, and ends March 14, 2008.
If correct, this analysis could indicate that Microsoft is willing to do quite a bit to ensure that Yahoo becomes a Microsoft "partner."
According to Bloomberg, this purchase will be the largest acquisition ever in the technology industry. It will certainly have the effect of rocking some boats. But the real question to all of us, the Internet consumers, is "Do you want to Mahoo?"
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