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Proxy Fight for Yahoo Is Predicted

Strategy Less Expensive for Microsoft

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By Kim Hart
Washington Post Staff Writer
Wednesday, February 20, 2008; Page D03

Yahoo said yesterday that it would offer severance packages to employees affected by any change in control of the company as analysts predicted that Microsoft would wage a proxy battle rather than increase the value of its takeover bid.

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Entering a proxy battle is a less-expensive alternative to raising its $44.6 billion offer, which Yahoo's board rejected last week. Microsoft, saying it would "pursue all necessary steps" to close a deal with Yahoo, would be likely to pay between $20 million and $30 million to pursue a proxy fight, financial analysts said. By comparison, they said, raising its $31-per-share offer could cost Microsoft nearly $1.5 billion for every dollar per share that it adds to the bid.

In this case, a proxy fight would mean that Microsoft would attempt to persuade Yahoo shareholders to vote for new board members who supported a takeover.

Microsoft acknowledged a proxy fight as one of its options to acquire Yahoo, but declined further comment. Yahoo declined to comment on the takeover effort.

Although a proxy fight could be cheaper for Microsoft, it could also "elongate the uncertainty relating to the deal," said Laura A. Martin, senior Internet analyst with Soleil Securities. That could accelerate an exodus of Yahoo engineers and employees who are key to Microsoft's goal of catching up to Google in online advertising, where it has a huge lead, she said.

Microsoft has until March 13 to nominate directors to replace Yahoo's existing 10 board members, all of whom are up for re-election this summer.

The vulnerability of Yahoo's board, coupled with a 12.8 percent dip in Microsoft's stock price since announcing its offer two weeks ago, leads many analysts to believe Microsoft is likely to start appealing to shareholders soon.

But Microsoft will also want to avoid a protracted battle.

"They don't want to see a scenario arise where Google is benefiting from distractions and delays" in both companies' business initiatives, said Scott Kessler, senior equity analyst for Standard & Poor's. "The longer this goes on, the more you're going to see attrition in Yahoo's employee ranks, making Yahoo less appealing."

Separately, Yahoo, which announced last month that it would lay off as many as 1,000 workers, said yesterday that it would offer severance packages to employees affected by any change of control. The plans include severance pay, accelerated vesting of options and reimbursement for outplacement, Yahoo said in a filing with the Securities and Exchange Commission.

Yahoo is not defenseless against a hostile takeover. It has a shareholders rights plan, also known as a "poison pill," which allows its board to issue more stock, which would dilute the value of existing shares and make a takeover more expensive for Microsoft.

If Microsoft acquires more than a 15 percent stake in Yahoo without the board's approval, according to Yahoo's poison pill provision, Yahoo could issue up to 15 times the company's existing 1.4 billion outstanding shares. To acquire the resulting 19.7 billion shares, Microsoft could have to pay a massive premium that could top $300 billion.

"It's a scare tactic; it's meant to bring people to the negotiating table and prevents companies from being surprised by unwelcome bidders," said Jeffrey Block at Thomson Financial.

He added that many large corporations are ditching their poison-pill provisions, partly because shareholders believe it could obstruct a reasonable offer from another firm.

If Yahoo's board continues to resist Microsoft's offer, a proxy fight is Microsoft's primary option, Kessler said. Gaining control of the board could also nullify the poison-pill provision.

"This has the potential to get ugly," Kessler said. "But at the end of the day, Microsoft's is the only offer on the table, and we think it's a pretty compelling one."

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