Microsoft continues to circle Yahoo!

Despite withdrawing its bid for Yahoo! in terms that suggested it was walking away completely, Microsoft continues to circle its prey. But the acquisition remains off the table, what's the next step?

Over the weekend, Microsoft issued this terse statement:

"In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business. Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties.

"There of course can be no assurance that any transaction will result from these discussions."

The idea of purchasing selected parts of Yahoo! ties in with moves by Carl Icahn to take control of the board. Icahn's history suggests he would be far more amenable to the idea of breaking up the company than would the existing board and executives.

That said, it is not beyond belief that the Yahoo! board could see a selloff of selected assets or business units as a way of fending off Icahn's appeal to shareholders in the looming proxy contest. It would effectively send the message "hey, we've already realised some value for you - there's no need to bring in the other guy."

How did Yahoo! respond?

Yahoo!'s response was almost as terse:
"Yahoo! has confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo! at this time. Yahoo! and its Board of Directors continue to consider a number of value maximizing strategic alternatives for Yahoo!, and we remain open to pursuing any transaction which is in the best interest of our stockholders. Yahoo!'s Board of Directors will evaluate each of our alternatives, including any Microsoft proposal, consistent with its fiduciary duties, with a focus on maximizing stockholder value."

If Yahoo shareholders really do want their company to be acquired, presumably they will vote for Icahn's slate in the hope that the new board can attract a fresh bid from Microsoft.

But if you were running Microsoft and you knew the new Yahoo! board favoured a takeover, would you offer more or less than the previously rejected price? Icahn has already stated that $US33 per share is better than keeping Yahoo! as an independent business, so maybe the same goes for $US32, $US31 or maybe even $US30. Icahn probably paid less than $US28 for his Yahoo! shares and the bulk of his stake is in the form of options rather than shares, so even a $US2 or $US3 profit per share could be a nice little earner for him - providing the deal goes ahead.

If there's not even a partial acquisition, what's to stop the shares sliding back to $US20 or so, where they were languishing prior to Microsoft's bid? Sure, Yahoo! hasn't been sitting idle since the offer was made, but have there been any changes that might reassure potential shareholders that the value of the company will significantly increase even if it is no longer a takeover target?

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