About a month ago Steve Ballmer had issued a threat to Jerry Yang of Yahoo. Accept Microsoft's unsolicited buy out offer of $31 per share or be prepared for the consequences! Ballmer had given Yang till April 26th to accept the offer or face a hostile takeover. He had hinted that in case of the latter event Microsoft may even lower the price offered. '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 in a letter to Yahoo.
26th April came and went and nothing happened. In the meantime Jerry Yang said nothing except that his company was worth much more and that he expected its cash flow to double over the next three years to $3.7 billion.
Now the news is out that Microsoft has boosted its offer 'by several dollars a share,' lending weight to the prediction by many analysts that Microsoft can afford to pay up to $35 a share.
How has Yahoo managed to outwit Yahoo so far? Jerry Yang has played his cards remarkably well.To start with he has protected his company with a 'poison pill' takeover defense which makes a hostile takeover very expensive. He also has an employee payout plan that will be triggered by a change in ownership, raising the cost of acquisition. There were also rumors that Yahoo was close to a deal with AOL. He also entered into an agreement with Google, allowing it to serve its ads on Yahoo's search pages. He gave a clear signal that if pushed too far he would not hesitate to sell off a part of his company and use the cash for a share buy back, driving up their price. This would have both appeased disgruntled shareholders , as well as raised Microsoft's purchase price.
Microsoft on its part had entered into some sort of an agreement with Rupert Murdoch's News Corp, so that Yahoo may not find a rival buyer for itself. This strategy seems to have failed.
It is rumored that several Yahoo shareholders would be satisfied with $35 a share. Microsoft had offered $40 a share for Yahoo in early 2007, but given Yahoo's troubles since then it is unlikely that price will be offered again.
There is still a long way to go. Even if a deal is reached, Google will continue to dominate the internet search market in the US where it has an almost 2/3rd share compared with 9.45% of Microsoft and 21.3% of Yahoo. Meanwhile Yahoo shares jumped almost 7% to $28.67 a share in trading Friday, as the news broke. Microsoft shares closed almost flat at $29.24 a share.