Yahoo mum as Microsoft merger deadline passes

Yahoo Inc. let a Saturday deadline set by Microsoft Corp. to accept a merger pass in silence, setting the stage for the next chapter in the three-month standoff of technology titans.

Impatient with the speed of negotiations, Microsoft had given Yahoo's board three weeks to agree to its blockbuster acquisition offer, initially valued at $44.6 billion, or face the consequences.

Now that the deadline has expired, the consequences are unclear. Microsoft has vowed to disclose its strategy sometime this week in a move that promises to intensify the drama in this corporate chess match.

To demonstrate its resolve, Microsoft executives have mentioned several options at their disposal - all of which pose hazards to Yahoo. But the threats are also a common negotiating tactic intended to pressure a reluctant company to acquiesce to a takeover bid.

Yahoo's board unanimously rejected Microsoft's overture early in the merger dance, saying that it substantially undervalued the company, given its big brand name, international reach and hundreds of millions of users.

Last week, Yahoo CEO Jerry Yang said he's not opposed to a merger, but that he would only agree to one at a higher price. Microsoft has dismissed that idea, leaving the courtship at a tense stalemate.

The stakes are high. Yahoo, the Sunnyvale Internet icon, has a 13-year history as an independent company, but recently has fallen into a financial slump. Microsoft, the Redmond, Wash., software-maker, is convinced that combining forces will bolster its online business, which trails far behind industry juggernaut Google Inc.

Among Microsoft's options is to take its bid for Yahoo hostile by asking the portal's shareholders to replace Yahoo's board with a more merger-friendly slate of directors. Microsoft has said that if it chooses this route, called a proxy contest, it might lower its price for Yahoo to reflect the damage a fight might cause.

Hostile takeover bids often prompt an exodus of workers and make hiring difficult.

Analysts said Microsoft would prefer to complete the transaction on friendly terms, rather than buy damaged goods. But Jeffrey Lindsay, an analyst with Sanford Bernstein & Co., said that Microsoft CEO Steve Ballmer is likely to start a hostile bid, regardless.

"Ballmer will make good on his ultimatum," Lindsay said. "I don't think he would like to pick up a reputation for not following through."

Yahoo has been busy trying to cobble together an alternative to a Microsoft takeover, including holding discussions with Time Warner Inc. and News Corp. about taking control of their Internet properties. Yahoo also tested an advertising partnership with Google, but the deal has come under scrutiny by federal regulators, who have antitrust concerns.

Lindsay said that coming up with a deal is imperative for Yahoo if its management wants to keep the company independent. If shareholders see no change, he said, they undoubtedly will side with Microsoft at Yahoo's annual meeting, which is as yet unscheduled, but could be held in July or shortly thereafter.

Another option that Microsoft executives increasingly mentioned last week is to drop their offer for Yahoo, originally priced at $31 per share, a 62 percent premium. The threat puts intense pressure on Yahoo's board from shareholders, because the value of the stock would likely plummet.

Microsoft executives said last week that they could focus on reinvigorating their online business without Yahoo. But dropping the bid might also be a ploy; they could come back later, presumably after Yahoo's board and its shareholders sweated it out and finally saw the wisdom of a deal.

"I think that for the time being, Microsoft will step back, let the dust settle and watch the fur fly between shareholders and management," said David Garrity, director of research for Dinosaur Securities. "Microsoft could always come back."

Most analysts believe that, after all the machinations, Microsoft will ultimately acquire Yahoo. Although Yahoo is trying to conjure up alternatives, they say, the reality is that it doesn't have many.

Derek Brown, an analyst with Cantor Fitzgerald, said, "Yahoo doesn't seem to have a whole lot of options that are as good as or better than what Microsoft seems to have put in front of them right now."