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Yahoo Board Decides To Reject Microsoft's $44.6 Billion Offer

By Kim Hart and Peter Whoriskey
Washington Post Staff Writers
Sunday, February 10, 2008

The Yahoo board has decided to reject Microsoft's unsolicited $44.6 billion cash-and-stock buyout bid, a source close to the discussions said, setting the stage for what could be a prolonged takeover battle between the two tech companies.

The Yahoo board thinks Microsoft's offer significantly undervalues the Internet company, the source said, speaking on the condition of anonymity because the decision is not yet public. The Yahoo board held a series of meetings last week, and a letter rejecting the deal is to be sent tomorrow.

Microsoft's bid to buy Yahoo is an attempt by the world's most influential software company to gain a stronger foothold online, where it has sought and failed to gain ground against Google. The acquisition would give Microsoft access to Yahoo's 137 million monthly visitors and its online display-advertising business.

Microsoft could try to circumvent the Yahoo board decision by appealing directly to shareholders, analysts have said. If Microsoft takes that route, it would probably have to nominate its own slate of directors to replace Yahoo's current 10-member board, all of whom are up for reelection this summer. The deadline for board nominations is March 13.

Microsoft could also increase its offer. Many analysts have said they think Microsoft is prepared to bid at least $35 a share for Yahoo, which has one of the largest online audiences and a lucrative ad platform, despite its slump in the search-advertising market.

Yahoo's decision was reported on the Web site of the Wall Street Journal yesterday. Microsoft declined to comment.

Yahoo shares closed at $29.20 Friday, more than 50 percent higher than on Jan. 31, the day before Microsoft's bid.

Yahoo might fend off the offer by exploring new business tactics. Most prominently, analysts have said, Yahoo could outsource its search-ad function to Google.

Such an arrangement could allow Yahoo to use ads from Google in exchange for a share of the revenue. That could involve Yahoo abandoning its own search-advertising system, which has fallen behind Google's in consumer search.

"If Yahoo's board and management want to remain independent, shareholders will insist on a major, value-creating strategy to balance the Microsoft bid," Citigroup analyst Mark S. Mahaney wrote in a note to investors last week. "This may be the only viable strategy," by potentially increasing Yahoo's cash flow by 25 percent or more.

But a revenue-sharing pact with Google may meet substantial review from regulators given the companies' large shares of the search and search-advertising markets. A combined Yahoo-Microsoft would probably also meet regulatory scrutiny.

For Microsoft, combining with Yahoo would allow it to compete more effectively against Google, which has become the preeminent search engine and captures the largest share of online-advertising revenue. Microsoft has said the deal will give consumers more choice in a market that has increasingly become dominated by a single player, as well as give Yahoo a needed boost.

"In terms of the offer itself, we believe it's extremely attractive for both Microsoft shareholders and Yahoo shareholders," Christopher P. Liddell, a Microsoft senior vice president, said earlier this month when the proposal was announced.

But Yahoo's management has expressed a strong desire to stay as independent as possible. Yahoo chief executive Jerry Yang has resisted previous overtures by Microsoft in hope that improvements to the company's search engine would lift the company's standings, Microsoft noted in its offer letter Feb. 1.

"Yahoo's board is carefully and thoroughly evaluating the Microsoft proposal in the context of all of the company's strategic alternatives and will pursue the best course of action to maximize long-term value for shareholders," a Yahoo spokesman said yesterday.

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