Yahoo gets hit with the backlash

Go to Original
By Jessica Guynn

Analysts, investors and employees second-guess the decision to rebuff Microsoft's bid.

SAN FRANCISCO — After a three-month standoff with Microsoft Corp., Yahoo Inc. is about to square off against its shareholders.

Incensed that Yahoo rebuffed Microsoft's last-ditch takeover offer worth $47.5 billion, investors sent its shares plunging 15% on Monday, erasing about $6 billion in market value. Many are pressuring Yahoo's board of directors to revive talks with the software giant.

Yahoo held out for $37 a share, $4 more than Microsoft's best bid, but one major investor said Monday that shareholders would have supported a takeover at $34. Portfolio manager Gordon Crawford blamed Yahoo Chief Executive Jerry Yang's "unrealistic" view of the company's value for the collapse of talks.

"Yahoo drove away a willing and fairly generous buyer, and all of us are the poorer for it today," said Crawford, of Los Angeles-based Capital Research Global Investors. Its parent company, Capital Research & Management Co., owns more than 16% of Yahoo's shares, making it the largest holder, according to regulatory filings.

But Yahoo's executive team said it remained confident in its strategy to turn around the Internet pioneer, which has struggled with slowing growth and stumbled in its heated competition with Google Inc. and other players. President Sue Decker said the company planned to be a leader in the lucrative online advertising market, both in search and display.

"At the end of the day, Microsoft made a decision on what it was willing to pay or not pay, and our board made a decision on what it was willing and not willing to sell for," Decker said. "Those two didn't meet."

Yahoo shares fell $4.30 to $24.37 on Monday, closing well below Microsoft's offer of $33 a share but 27% higher than the $19.18 they fetched before Microsoft's initial unsolicited bid was made public Feb. 1.

Brokerages cut ratings and price targets. A few unleashed condemnations.

William Morrison, an analyst with ThinkPanmure, said the rebuff to Microsoft could go down as "one of the most destructive decisions for shareholder value in the history of Internet stocks."

The mood was equally tense on the company's Sunnyvale, Calif., campus, where employees will convene today for an all-hands meeting. At the event, Yang will attempt to quell rising anxiety about Yahoo's future. Recruiters are already pouncing, taking advantage of waning confidence in the vision of Yahoo management, said one longtime employee who asked not to be named because he was not authorized to speak to the media.

"There are definitely no 'Ding-dong, the witch is dead' refrains," he said. "There are no happy campers here. Those who did not want Microsoft to buy Yahoo are in the vocal minority."

Yahoo's stock didn't fall as much as it might have because the company is in advanced talks with Google about a partnership revolving around search advertising. Such a deal, though, would be likely to encounter intense regulatory scrutiny.

Yahoo is also in talks with Time Warner Inc. about its AOL unit. The proposed arrangement would give Time Warner an 18% stake in the combined company. Yahoo management would not address speculation about either possibility.

Analysts say Yang and his executive team have a lot to prove in the coming weeks: that Yahoo is worth $37 a share, the price it demanded from Microsoft on Saturday. They must do so under the Wall Street microscope and despite a weakening economy that is taking a toll on the online advertising market. Already impatient with management's problems with focus and execution, investors are openly skeptical about the 2009 and 2010 financial targets the company has released.

Scott Kessler, an analyst with Standard & Poor's, said Yahoo had made "mistake after mistake after mistake," adding: "Over the last number of years, Yahoo has failed to make the right strategic and tactical decisions to deliver a higher stock price."

Patrick McGurn, special counsel to RiskMetrics Group, a corporate watchdog that advises investors on voting on proxy issues, said Yahoo would have to justify its asking price and restore the stock's value to placate investors.

"You're going to see extreme pressure on Yahoo's board and management to prove that they were justified in turning away what might be the best offer available," McGurn said. "Shareholders are not going to tolerate a return to business as usual."

Yahoo is facing threats to unseat the board at its next annual meeting, which on Monday was scheduled for July 3. Dissident shareholder Eric Jackson, who has organized a group of about 140 investors who own roughly 2 million shares, is leading the effort. He has spoken with 12 more shareholders since Microsoft canceled its offer, he said.

Some are interested in putting together an alternate slate of directors.

"People are in shock and are livid at the Yahoo board," Jackson said. "I think the 'withhold' vote will be a slam dunk."

Yahoo is also facing a barrage of shareholder lawsuits. Stanford law professor Michael Klausner said the board had no legal exposure. "It's more smoke than fire," Klausner said.

But he added, "Yahoo will have to revive its stand-alone value. If that works, shareholders will be happy. If it doesn't, Microsoft will be back."