Yahoo Officially Rejects Offer

February 11, 2008.

“After careful evaluation, the board believes that Microsoft’s proposal substantially undervalues Yahoo including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments,” the company said in a statement.

The company said it would continue to evaluate all its options.

Yahoo shares rose in morning trading Monday, apparently on anticipation that Microsoft might sweeten its offer. They were trading at $29.44, up 24 cents. Microsoft’s shares were at $28.08, down 48 cents.

Analysts have suggested the company could afford to pay as much as $35 a share for Yahoo, up from its current offer of $31.

The next move is now up to Microsoft and a largely unknown executive on the company’s sprawling campus, Christopher P. Liddell.

Mr. Liddell, a former banker from New Zealand, is the behind-the-scenes architect of Microsoft’s hostile takeover, the company’s first unsolicited bid and perhaps the most audacious effort by a technology company to wrestle control of a competitor.

With Yahoo’s board rejecting Microsoft’s advances, it will fall to Mr. Liddell, an outsider to the software industry who joined Microsoft as its chief financial officer just two years ago, to plot the company’s next steps in this bitter battle — and in the process, reshape Microsoft’s not-invented-here culture toward making aggressive acquisitions.

“You have to be disciplined and ruthless,” Mr. Liddell said by telephone last week, before Yahoo’s board decided to rebuff the offer. “We should see acquisitions as a way of growth. We should not be embarrassed at all.”

Microsoft has made acquisitions over the years, but mainly smaller ones to jump-start a fledgling business or pick up a needed technology. Its media player, voice recognition, health search and business software, among others, are technologies Microsoft bought along with the companies that created them.

However, when it has come to making big deals, it has balked until recently. In late 2003, Microsoft talked to the big German business software maker, SAP, about buying it. The deal, had it been pursued, would have cost Microsoft more than $50 billion.

The talks, made public in a court case in 2004, were abandoned, Microsoft said, because of the “complexity of the potential transaction,” especially the management headaches of trying to put the two big software companies together.

Mr. Liddell, who calls himself Microsoft’s “gatekeeper of funding,” spent the weekend devising ways to raise the stakes in the fight for Yahoo now that the company’s original proposal has been rejected, holding a series of marathon conference calls with his cadre of Wall Street advisers.

More an accountant than a technologist, Mr. Liddell, who joined Microsoft after serving as chief financial officer at International Paper, the giant forest products company, clearly has no compunction about ruffling any digital feathers. Among his alternatives is a series of bare-knuckle Wall Street tactics: First, Microsoft is planning to crisscross the nation to meet with Yahoo’s largest shareholders in an election-style campaign, hoping they can put pressure on Yahoo’s board, people briefed on the company’s plans said.

Microsoft may have an easier time than it could have had two weeks ago: since then, millions of Yahoo’s shares have traded hands to short-term-oriented hedge funds that typically favor a quick sale, as opposed to value investors who hold shares for the long term.

Microsoft could also decide to make an offer directly to shareholders, called a tender offer, which would put more pressure on Yahoo’s board to negotiate. At the same time, Microsoft could also set a deadline for its bid, known as an “exploding offer.”

And if Microsoft decides to make this a nasty battle, it could start a proxy contest to oust Yahoo’s board at its next election; it would have until March 13 to nominate a new slate of directors.
Microsoft’s advisers in the takeover effort are Morgan Stanley and the Blackstone Group. Its lawyers are Simpson Thacher & Bartlett and Cadwalader Wickersham & Taft.

They are facing Yahoo’s team of bankers at Goldman Sachs, Lehman Brothers and Moelis & Company, and its lawyers at Skadden, Arps, Slate, Meagher & Flom.

Microsoft also hired outside public relations advisers, Joele Frank, Wilkinson Brimmer Katcher and Waggener Edstrom Worldwide. Yahoo has Abernathy-McGregor and Robinson, Lehrer, Montgomery.
Microsoft may simply raise its offer to clinch a deal. But Mr. Liddell, speaking generally about negotiations, seemed to suggest he was willing to play hardball. “You have to be willing to walk away,” said Mr. Liddell, who plays rugby regularly and has completed several triathlons.

For Mr. Liddell, who sends e-mail messages to colleagues at all hours and is a PowerPoint whiz, the prospect of joining Microsoft as an outsider and trying to transform it into a financially oriented acquisition machine was daunting. “I knew there had been a history of people coming in here and it not working,” he said.

Mr. Liddell was one of several high-profile outside hires at Microsoft in recent years including Ray Ozzie, the creator of Lotus Notes, as the company’s chief software architect; and B. Kevin Turner, a former Wal-Mart executive, as chief operating officer.

Mr. Liddell, who has a master’s degree in philosophy from Oxford, found that with Bill Gates and the president, Steven A. Ballmer, “If you do a good job, you fit in. They don’t suffer people very well who don’t come prepared.”

He has a background as an investment banker at Credit Suisse First Boston in Auckland. Since he joined the company, Microsoft has made 50 acquisitions.

He has pushed the company to use its cash — it has spent $54 billion on stock buybacks and dividends since his arrival. And it has even taken on, dare it be said aloud at Microsoft, debt for the first time in the company’s history. If the company’s bid for Yahoo is successful, Microsoft will be doing both.