Microsoft-Yahoo: Deal or No Deal?

Three weeks ago, Microsoft Corp. CEO Steve Ballmer threatened to launch a hostile takeover if Yahoo Inc. 's board did not accept its US$44.6 billion takeover bid.

Now, however, Microsoft seems to have backed away from its tough talking and said it's prepared to withdraw its offer to buy Yahoo if there is no progress by this weekend. "As we said recently to the board, unless there's progress by this weekend, we will reconsider our alternatives," said Chris Liddell, Microsoft's chief financial officer, in a conference call yesterday to discuss the company's financial results.

Yahoo did not respond to a request for comment about the deadline, but the company has said it would consider Microsoft's offer if the software giant upped the ante, which is is unlikely to happen. Microsoft declined to comment for this story.

"Although Microsoft could live without Yahoo, its perception is that acquiring Yahoo would put it in a much better position to compete against Google ," said Keith Hylton, a professor at the Boston University School of Law. "So while they could live without Yahoo, it's an asset they think is pretty valuable."

Still Serious

While Microsoft is backpedaling a bit on its threat to take its case directly to Yahoo's shareholders, Hylton said it's his guess that Microsoft is serious about acquiring Yahoo as soon as possible and, if all else fails, every option is on the table, including a hostile takeover.

"I don't think this is something they're just going to walk away from at this stage, although there may be a stage where they walk away, like if the takeover takes too long or if there are regulatory obstacles that stand in the way," Hylton said.

On the other hand, Rob Enderle, principle analyst at Enderle Group in San Jose, said it looks like Microsoft is positioning itself to walk away instead of initiating a hostile takeover.

"The rhetoric that is coming out, especially from their CFO, says he is on the side that says we walk away from this, and the CFO gets a significant vote," Enderle said. "And clearly if you look at the internal support for this, it has dwindled within Microsoft by quite a bit, so I think at this point they're likely to walk away."

In addition, Enderle said Microsoft's latest financial results weren't where they needed to be to make this kinds of acquisition.

"The design of the bid that Microsoft put forward, as high as it was, was so it would happen quickly," Enderle said. "A hostile [takeover] would be a long, drawn out, proxy fight and antithetical to what Microsoft wanted to accomplish."

He added that it doesn't make sense for Microsoft to drag Yahoo kicking and screaming into its company. "It's just not a good practice, even in a recessionary year, and I think Microsoft is starting to step back and say it thinks there are other things it can do that are looking more attractive," he said.

If there is no deal, Enderle said the market would "reward" Microsoft for stepping away. "Microsoft's stock dropped dramatically on announcement of this deal, and I think that the market would reward Microsoft for walking away and reward them sharply," he said.

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