Microsoft Launching a Proxy Fight for Yahoo? Really?

The Big Duh

Come on, folks. This is no big surprise as yours truly has blathered on about, quite accurately, I might add. But let me be clear: just because the tactics are right doesn't mean the deal makes sense. In fact, I think the deal stinks as a strategic matter (technology integration risk, culture risk, etc.) - but who am I to criticize the great minds involved in such a ground-breaking (as in being buried) transaction? But that is besides the point, or my point, at least, which revolves around how to handle M&A situations like the one we have here.

Proxy Fight: Getting Goaded, Getting Serious

So, Microsoft was essentially goaded into a proxy context due to Yahoo management's lack of shareholder focus and intransigence. Now this is not the way one generally wants to run a people-centric technology acquisition, but Microsoft clearly believes that it can financially compensate key Yahoo! personnel such that the huge attrition that will invariably take place won't damage the core strategic rationale for the deal. And given that each additional dollar of acquisition compensation costs Microsoft $1.4 billion, getting hostile, paying for the proxy fight and showering riches over a select group of key personnel will be a far cheaper exercise than giving in to Bill Miller's bluster and Yahoo's advisors' hopes that Microsoft will jack the price by $2-$4 per share. Nice to see Microsoft being so fiscally responsible - thus far.

Fairness Opinions: What's Fair About Them?

Yahoo's advisors' have issued an opinion to Yahoo's Board that the current offer simply isn't fair. Really? Just like so many issues of late, this one is fraught with conflicts of interest. Consider this well-reasoned extract from the Deal Professor:

The highly subjective nature of valuations rears its head most acutely with fairness opinions. A fairness opinion is an opinion typically provided by an investment bank to an acquisition target that the price being paid by an acquirer is fair from a financial perspective. The opinion is often prepared using the valuation techniques above.

But investment banks are usually under pressure from their clients to come to the “right” answer on fairness. Moreover, investment banks are often conflicted in providing theses opinions, because their compensation is often contingent upon completion of a transaction (and, by extension, their finding of fairness) or they may want to preserve a future stream of business. The subjectivity of valuation and the conflicted nature of banks makes the process vulnerable to manipulation to arrive at fairness.

It has been and will likely always be this way. A(n) (un)fairness opinion is a cloak behind which countless Boards have hidden, either as support for completing a deal that isn't necessarily the best for shareholders or for turning down a deal that is in the best interests of shareholders. What we all should keep in mind here is that the fairness opinion issued to the Yahoo Board is worth about as much as the paper it is written on. Crumple it up, start again and you, too, can come up with just about any value you want to justify.

The Bottom Line: Hang Tough, Mr. Softee

If for no other reason than to show how shoddy governance practices and weak shareholder advocacy will not stand, Microsoft should stand firm to its current $31 offer and ram it through with the help of a good proxy solicitor and a world-class PR campaign (one that is better than that for many of its products, hopefully). It will be a boon to shareholder rights' advocates everywhere. They have put a fair offer on the table. No other competing transaction comes close (Yahoo and News Corp. - give me a break). The "just say no" defense doesn't work here because of countless and persistent management miscues and no plan. If Microsoft goes away Yahoo stock will plummet like a stone, causing lawsuits to come out of the woodwork like you would not believe. Get it done, Steve. Take no prisoners. This is what you're good at. Like your other Pacific Northwest friends, Just Do It.

Comments

[Roger]

david, in a proxy fight what microsoft is trying to do is get their slate of directors elected to the board. what you are describing is a tender offer. if microsoft were to launch a tender offer, that would be an offer direct to yahoo's shareholders. if the minimum threshold of acceptable tenders was not received at the $31 level, then the tender offer would fail. what is going on now is gamesmanship between msft management and yahoo's board. that's all it is. but given the board of yahoo's attitude, they are putting themselves in harm's way of getting sued. because believe me, david, this stock is likely to hit $20 before it hits $40.

[David McKinsey]

In a proxy fight, Microsoft wouldn't be negotiating with Yahoo's board. It would be negotiating with Yahoo shareholders. If a large enough portion of Yahoo's shareholder base believes Yahoo is worth $40 -- and won't vote "yes" to Microsoft at lower prices, that would become a self-fulfilling prophecy so long as Microsoft were willing to pay $40, right?