Revisiting Microsoft and Yahoo

Years ago, I worked for Smith Barney, a stock brokerage house known for its corporate finance department. That department helped to bring companies public as well as putting together important mergers. I learned a lot during my time there, eventually earning my broker's license.

We're going to look at the situation with Yahoo and the offer made for it by Microsoft.

When last we discussed the matter on February 1st, Microsoft had just made a $31 per share bid to take over Yahoo.

Since that time, Yahoo has formally rejected the offer, saying it was too low. The Yahoo board believes a fair price would be $40/share. This from a company that was selling at $19 prior to the bid and that--two days before the bid--had warned its shareholders not to expect its performance to improve before 2009.

I thought it might be helpful to look at a glossary of the terminology used in acquisitions and takeovers. Listed below are the applicable terms. The definitions in italics are courtesy of Verisign. The comments that follow are mine:

Bear Hug: An offer made by a company to buy the shares of another company that is too high for the board of the target firm to refuse. Microsoft bid $31/share and got turned down. The question is whether they're willing to sweeten the offer to the point that Yahoo's board would be unable to turn it down. Experts think this is unlikely. Why offer more unless you have to? Unless, for example, Yahoo finds itself a white knight to make a competing offer that Microsoft is then forced to match.

Black Knight: A company that makes a hostile takeover offer on a target company. Microsoft has the potential to become a black knight. If they decide to go around the Yahoo board directly to the shareholders, they will have moved into black knight territory.

Hostile Takeover: A takeover attempt that is strongly resisted by the target firm. Microsoft made a polite offer and was turned down politely. If Microsoft decides to go hostile, CNET News believes it will try one of two things: (1) Make a formal tender offer, going directly to the shareholders with the deal, giving investors a deadline by which to turn over their stock to Microsoft, and/or (2) Nominate their own candidates for the Yahoo board. The entire ten-member board is up for re-election at the annual meeting (probably in June). This move would allow Microsoft to push their deal through and, importantly, flush Yahoo's poison pill down the toilet.

Poison Pill: A strategy used by corporations to discourage a hostile takeover by another company. The target company attempts to make its stock less attractive to the acquirer. Reuters reports that in March 2001, Yahoo adopted a poison pill. If anyone buys 15% or more of Yahoo's stock (outside of an agreed-upon bid), shareholders are offered the right to buy more shares. This, of course, will dilute the value of the shares the black knight has acquired, making it much more expensive for the takeover company to acquire Yahoo.

In addition to its poison pill, Yahoo is actively looking for a new partner that will be more likely to allow its company to remain independent. As opposed to a black knight, such a partner would be called a white knight.

White Knight: A company that makes a friendly takeover offer to a target company that is being faced with a hostile takeover from a separate party. Reports indicate that Yahoo may be in talks with both News Corp. and AOL, in the hope that one of the two might become its white knight.

Stay tuned . . .