Microsoft restarts Yahoo merger talks

Published on Saturday 3 May 2008 14:56

AFTER a three-month standoff, Microsoft is said to be back in active merger talks with Yahoo. Steven Ballmer, Microsoft's chief executive, is believed to have lobbied large Yahoo shareholders recently to win their support.

Microsoft, which had threatened to abandon its bid or initiate an attempt to oust Yahoo's board, has increased its offer "by several dollars" per share, according to a source.

But a deal was still far from certain. One of those involved in the discussions said the chances of a friendly deal being reached were "still no better than 50-50".

The talks were an effort by Microsoft to reach a negotiated agreement and avert the collapse of a blockbuster deal that could reshape competition on the internet and give Microsoft greater standing in its intensifying rivalry with Google. The discussions represent a breakthrough after weeks of behind-the-scenes manoeuvring on both sides.

According to sources, Microsoft is willing to pay more than $33 a share. Yahoo is still holding out for at least $37 a share, it has been claimed. Each $1 a share represents about $1.4bn extra in the value of the deal.

Shares of Yahoo rallied on Friday on news of the renewed talks, rising to $28.67, up $1.86, or nearly 7%. Microsoft shares dropped to $29.24, or 0.5%.

The main stumbling block has been a disagreement over the value of Yahoo. Microsoft's initial stock-and-cash offer on January 31 was valued at $44.6bn, or $31 a share. After the decline in Microsoft's share price, the offer was worth $29.40 a share on Friday.

Yahoo repeatedly rejected Microsoft's bid, saying it substantially undervalued the company. But Jerry Yang, the co-founder and chief executive, said he would not be opposed to a deal with Microsoft at a higher price.

Speaking to Microsoft employees on Thursday, Ballmer said: "I know exactly what I think Yahoo is worth to me. I won't go a dime above, and I will go to what I think it's worth if that gets the deal done."

The higher offer was as much an attempt to bring Yahoo to the negotiating table as an effort to win over large Yahoo shareholders, whose support would be essential in a proxy fight.

Analysts said that by raising its offer, Microsoft was probably trying to avoid having to follow through with a hostile bid, which it was not certain to win and which could have resulted in a drawn-out battle and the defection of many Yahoo employees. "Everybody wants to avoid an outright hostile bid," said Morton A. Pierce, who heads the mergers and acquisitions practice at Dewey & LeBoeuf, a law firm in New York.

While Microsoft's decision to raise its offer represents an about-face for Ballmer, who last month had threatened to lower it, Pierce said investors would judge his manoeuvring by the ultimate outcome.

"You threaten to lower in an attempt to get people to the negotiating table," Pierce said. "It doesn't mean that you have to carry through with it. If he is successful in the end, it means the tactic was successful."