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article imageOp-Ed: Another time around the maypole for Microsoft, Yahoo

By Paul Wallis     Jul 13, 2008 in Business
OK, so the words “Microsoft” and “subtlety” aren’t synonyms. Yahoo’s rejection of the current sledgehammer-like offer, however, has shown a few wrinkles that weren’t entirely obvious before. Carl Icahn is now a player, as many suspected.
If anything, Icahn’s presence makes this otherwise rather messy takeover attempt a lot more plausible.
Microsoft made an offer to take over Yahoo’s search business. Icahn was directly involved the deal. Previously his supposed raison d’etre was trying to remove Yahoo’s board, with much innuendo.
However, the guy didn’t make his money or his reputation simply by attracting tourists.
The New York Times:
The proposal made late last week represents a formal alliance between Microsoft, whose takeover efforts Yahoo had rebuffed for months, and the billionaire investor Carl C. Icahn, who is seeking to unseat Yahoo’s board. It also represents a newer, more hostile approach by Microsoft, in which the software giant is willing to team up with one of the most aggressive activist shareholders today. Among its requirements were the replacement of Yahoo’s board — and a response within 24 hours.
This alliance is the bit that spells out what’s actually being attempted. Microsoft doesn’t need all of Yahoo, in some scenarios. The “Microsoft competing with Google” issue doesn’t require that. Yahoo’s other business isn’t particularly relevant to Microsoft, and it doesn’t look like it’s part of their game plan.
Yahoo says the net effect of the takeover would be to dismantle the company. That may well be the case, and a better option than a lock stock and barrel approach. Less outlay, more grunt for the bucks spent.
So this item in the NYT article makes a lot of sense:
As previously reported, Microsoft unveiled a more aggressive and hostile approach last Monday when it implicitly backed Mr. Icahn’s efforts to remove Yahoo’s board. While the software company said it would be willing to make another offer for the search business or the whole company — in that order — it would not negotiate with Yahoo’s current board.
But it was superseded by the Microsoft-Icahn offer. The talks began on Thursday with a series of phone calls, including one from Mr. Icahn to Mr. Bostock, in which the activist investor claimed to speak for Microsoft, according to people briefed on the matter who refused to be identified because the negotiations are confidential.
Read this in the other sense, and this version of the offer means Icahn doesn’t want, or need, the search business.
It’s common practice in business that a process known as asset stripping is used to make companies more profitable, more efficient, or both. As a matter of fact it’s good business practice, and frequently gets rid of a lot of deadwood.
However, if you’re a Yahoo supporter, it means fragmentation, loss of identity, and shrinkage, relative to your current serene corporate state. It reduces growth potentials, and creates doubts all over the place.
In theory, anyway. “Yahoo supporter” and “Yahoo stock price ranges” seem to be at odds with each other. There’s not a lot of fanaticism going on.
Yahoo have meanwhile managed to shoot themselves in the foot with a statement they’d be prepared to accept a $33 a share offer for the whole company. This is after they rejected the original offer of $37 per share.
The current offer is complex, but makes for some interesting reading:
The offer on the table was a revision of Microsoft’s previous bid for Yahoo’s search business, in which Yahoo would effectively outsource the advertising that runs alongside search results. This time, however, Microsoft would shorten the 10-year agreement to five years, while guaranteeing that Yahoo would earn $2.3 billion in annual revenue for five years, up from the three-year guarantee of the original proposal. The contract could be renewed for another five years.
Microsoft also proposed having Yahoo sell its Asian assets. It also proposed making an equity investment of $3.9 billion and a preferred debt investment of $2.8 billion.
Yahoo didn’t buy the figures, and thinks that the alliance with Google will make more than that.
As a cashflow proposition, you’d need to hold a séance to figure out the projections, which is a turnoff for some.
The equity investments are a carrot of sorts. If I’m reading this correctly, the $3.9 billion would be a share placement, money in the bank for Yahoo, and the preferred debt would be a sort of loan, with stock as an investment taking the status of preferred stock. It’s similar, if not identical, to a debt for equity deal.
It’s not small beer, but for some reason, Yahoo don’t want to know.
Might be that the stock comes with a voting equity position they don’t want, which would make sense, because it would improve Icahn’s position, at least in theory. The preferred stock would constitute a possible two edged sword, debt to equity ratios changing negatively, in a weak market.
That’s not necessarily the case, but that’s how I read it. Could have used some more info. That quote is a bit like referring to World War Two and saying “something happened” as a description, but as a deal, it seems unnecessarily complicated.
On a pure yes/no basis, buying the search business outright would seem a simpler, no frills-but-efficient approach.
Introducing equity deals adds a few levels of intrigue, and unfortunately for Microsoft and Icahn, difficulty.
We’ll see. If another player comes in, this deal could be the benchmark for a better offer.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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