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Tickers in this Article: YHOO, MSFT, GOOG, TWX, NWS
Microsoft (Nasdaq:MSFT) has turned up the heat on Yahoo (Nasdaq:YHOO), giving it three weeks to get a deal done or face consequences. The software giant sent a letter to the board of Yahoo Saturday, stating that it will not up its $31-per-share offer for the company, and that if the offer is not accepted Microsoft may go hostile, and try to take the company out at a lower price.

Yahoo stated it is open to a takeover, but only if the bid comes up. It seems Yahoo's board don't know a good thing when they see it. (To learn more about hostile takeovers, check out Bloodletting And Knights: A Medieval Guide To Investing.)

A 62% Premium Isn't Enough?
The proposal was first announced by Microsoft on February 1, 2008. Microsoft offered a $41 billion buyout bid for the company, or $31 per share, representing a 62% premium to the stocks closing price of $19.18 on January 31. The deal seemed rather generous. Yahoo was clearly having trouble and the stock had been in a slump for quite some time, as mammoth rival Google (Nasdaq:GOOG) stole away market share. This is why I was so curious as to why CEO Jerry Yang has continued to scoff at the offer. The claim from Yahoo is that the offer significantly undervalues the company.

That seems to be an embarrassing admission for Yang. If the company is worth much more than the 62% premium that Microsoft is offering, Yang and the rest of Yahoo's management are doing a poor job of acting on the value in the last year.

Before Microsoft's bid, Yahoo's management led the company to lose more than one-third of its market capitalization over the previous year. Yang, who is a very smart man and co-founder of the company, should have stepped aside in the management department. This should be greeted as a rescue of him and the shares.

What This Means to Yahoo Shareholders
You can't fault a CEO for trying to get a higher bid. Many times a higher offer can be achieved through negotiations, shareholder dissent or competing offers. The problem comes in when there are no catalysts for a higher bid, and management's kicking and screaming just puts the current deal in jeopardy.

Now Microsoft, peeved by the two months of non-cooperation from Yahoo, has given the company a three week deadline to accept the offer or face the consequences. Microsoft CEO Steve Ballmer noted in the letter that a hostile takeover would be detrimental to the value of Yahoo, since the $31 offer anticipated a friendly transaction. Yang responded in a letter stating that Yahoo is not opposed to a deal with Microsoft, but wants a higher offer to reflect the value of Yahoo, and any strategic benefits it provides to Microsoft. How does that make sense? Why should Yahoo get the strategic benefits that Microsoft will get from buying it? That is the only reason Microsoft wants to do the deal.

Also, management at Microsoft made it clear they are not upping the bid. This could change, since anything could happen, but I doubt it. The offer seems like a very fair deal, and Yahoo has no alternatives. Its reported talks with News Corp. (NYSE:NWS) and Time Warner (NYSE:TWX) have turned up nothing in the form of bids so far. I think Yang and the rest will cave as the deadline draws near, but they're certainly putting the deal in more jeopardy than it needs to be. Yahoo shareholders should hope that the board wises up, or else sell their shares now in case Microsoft needs to go hostile.

The Bottom Line
The deal is facing more and more uncertainty. Yahoo's management fails to recognize it's the deal that is saving the company's value, which has been lost over the last year and a half. The letter from Ballmer puts a little more heat on Yahoo. I feel that the board will be forced to accept the bid, and I do not think Microsoft will raise it any higher. But Yahoo's conduct should certainly be worrying shareholders.

For more on takeovers, hostile or otherwise, check out our Mergers And Acquisitions Tutorial.

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