Yahoo! Defends Microsoft Game Plan

The Internet portal operator reiterates its duty to get the best possible deal -- whether with Microsoft or someone else.
By Pia Sarkar ,

SAN FRANCISCO -- In a sternly worded letter Monday,

Yahoo!

(YHOO)

blasted

Microsoft

(MSFT) - Get Report

for what it said was a mischaracterization of the companies' discussions about a possible merger -- while also reiterating that the deal significantly undervalues the Internet giant.

Yahoo! CEO Jerry Yang and Chairman Roy Bostock criticized Microsoft CEO Steve Ballmer for threatening to initiate a proxy battle and potentially lower the price of its original bid of $31 a share for Yahoo!, calling it "counterproductive."Yang and Bostock pointed out that Microsoft had met with Yahoo! on at least two occasions, and Ballmer had failed to advance the discussions in any way.

"We continue to believe that your proposal is not in the best interests of Yahoo! and our stockholders," they wrote. "Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo!. Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal."

When Microsoft made its initial offer in February, the cash-and-stock bid was valued at $44.6 billion, or 62% above Yahoo!'s market value. But as of Friday, the value had fallen to below $41 billion.

Over the weekend, Ballmer sent a letter venting his frustration with Yahoo! for not yet having worked out a deal. He added that if an agreement isn't reached in three weeks, he would take Microsoft's case directly to Yahoo! shareholders and launch a proxy battle to elect alternative directors to Yahoo!'s board.

In their response, Yang and Bostock said Yahoo! has been exploring all alternatives, including a transaction with Microsoft "if it represents a price that fully recognizes the value of Yahoo! on a standalone basis and to Microsoft, is superior to our other alternatives, and provides certainty of value and certainty of closing."

They concluded by saying that they are "steadfast in our commitment to choosing a path that maximizes stockholder value and we will not allow you or anyone else to acquire the company for anything less than its full value."

Yahoo! has been talking to

Time Warner's

(TWX)

AOL division and

News Corp.

(NWS) - Get Report

about a possible deal, but most observers believe that neither of the companies can offer a price as high as Microsoft. At the same time, Microsoft seems to be trying to dispel any notions that it will raise its offer.

In his letter, Ballmer implied that he might even lower his price if Yahoo! does not cooperate.

"If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal," he wrote.

Yahoo! has been trying to make a case to its shareholders that the company still maintains tremendous growth potential. Last month, it outlined a three-year plan in which it predicts that its cash flow will increase to $3.7 billion from $1.9 billion by 2010. It also plans to generate $8.8 billion in revenue, excluding traffic acquisition costs, two years from now.

Yahoo! further reiterated its revenue guidance of between $1.28 billion and $1.38 billion. As for the full year, Yahoo! is still expecting a top line of $5.35 billion to $5.95 billion. The company expects to post its first-quarter earnings on April 22.

In their letter, Yang and Bostock wrote, "In contrast to your assertions about the effect of general economic conditions on our business, Yahoo!'s business forecasts are consistent with what we outlined in our last earnings call. As you know, we recently reaffirmed our Q1 and full year guidance, which is a testament to our ability to perform in line with our expectations despite the current economic environment."

They added that "Yahoo! is worth well more as a standalone company than the value offered in your proposal, and would be even more valuable to Microsoft. Your own statements have made clear the strategic importance of Yahoo!'s substantial assets and capabilities to Microsoft."

Shares of Yahoo! were down 1.8%, or 51 cents, to $27.85 in recent trading.

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