Yahoo Is Said to Rebuff Microsoft Threat Over Bid

Yahoo is expected to respond by early Monday to a letter from Microsoft that threatened to lower the price of its buyout offer and take it directly to Yahoo shareholders, people close to the company said on Sunday.
Yahoo’s response is expected to reject negotiations and explain why Yahoo’s board believes the current offer price is too low. Although Microsoft’s offer was initially valued at $31 a share, a drop in the price of Microsoft shares has reduced the offer to just over $29 a share.
Microsoft’s chief executive, Steven A. Ballmer, raised the pressure on Yahoo’s directors on Saturday in a letter warning that Microsoft would begin a proxy fight seeking to oust them if the two companies did not reach a negotiated deal in the next three weeks.
Senior executives from the companies have met on two occasions since Microsoft made its offer public on Feb. 1, but they have not entered formal negotiations. Yahoo rejected Microsoft’s offer, saying it “substantially undervalues” the company, and people close to the company suggest that Yahoo executives see no benefit to negotiating unless Microsoft raises its price.
Yahoo’s board has asked Microsoft for information on antitrust issues and other matters but feels frustrated by Microsoft’s lack of response, according to people involved in the discussions, who were granted anonymity so they could discuss the confidential maneuvering.
For its part, Microsoft has insisted it sees no reason to raise its bid, because Yahoo, which has discussed alternative deals with other companies, has no competing offers.
“Basically Microsoft infers that Yahoo has no alternative deals in the offing, therefore there is no need to raise its price,” said Michael Klausner, a Stanford Law School professor who specializes in corporate law and governance. “Microsoft still prefers a negotiated deal to a proxy fight.”
Mr. Ballmer’s letter puts pressure on the board to act quickly or face the possibility that they will fail to get the best deal possible for Yahoo shareholders, Mr. Klausner said.
But waging a battle over board seats while offering a lower price for Yahoo could prove to be a gamble for Microsoft. In recent weeks, many large Yahoo shareholders have indicated that they would favor a deal with Microsoft, at a slightly higher price. It is not clear that Yahoo shareholders would be happy with a deal at the current price, let alone at a price that is even lower.
Still, some experts in mergers and acquisitions say that without an alternative, Yahoo shareholders are likely to vote in favor of a Microsoft offer, even if it is lower.
“Although shareholders may not be happy with a move like that, in general they will support a premium bid,” said Morton A. Pierce, who heads the mergers and acquisitions practice at Dewey & LeBoeuf, a law firm in New York.
Still, Mr. Pierce says that Microsoft may still raise its bid. “Generally in situations like these, people will bump their offer to avoid the monetary and social cost of going through a proxy contest,” he said.
In his letter, Mr. Ballmer noted that in the last two months, the stock market had declined and Yahoo’s business appears to have deteriorated. He also said that Yahoo had adopted a plan to retain employees in the event of a merger that would make Microsoft’s acquisition even more costly.
“By any fair measure, the large premium we offered in January is even more significant today,” Mr. Ballmer wrote. “We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.”
But Yahoo has disputed the notion that its business is deteriorating. In a presentation to investors in mid-March, executives reaffirmed their earlier financial projections for 2008 and put forward bullish growth forecasts for the next three years.