Microsoft readies assault on Yahoo board

February 19, 2008: 7:19 PM ET

Like a lion chasing a weakened gazelle, Microsoft knows it will capture Yahoo eventually. The challenge now is to do it as quickly and painlessly as possible.

To that end, Microsoft (MSFT) is moving in for the kill. The software giant is poised to take its takeover bid of more than $40 billion directly to Yahoo (YHOO) shareholders, overthrowing a Yahoo board of directors that dismissed the offer as too low. Microsoft executives hope that by forcing a shareholder vote, they can get speedier regulatory approval and avoid having to fork over billions more for Yahoo.

Microsoft would not officially comment about its next moves. But the company has retained proxy firm Innisfree to round up shareholder support, and a source familiar with the company's plans said Microsoft is indeed preparing to replace Yahoo's board and smooth the way for a takeover.

The bid for Yahoo comes because Microsoft believes that together the two companies can mount a challenge to Google (GOOG) in online advertising. Today Google is by far the top company in search advertising, and with its pending purchase of DoubleClick, it stands to dominate display advertising as well. Microsoft insiders say the Yahoo purchase is the company's best chance to slow Google's momentum and rally enough engineers to out-innovate the search juggernaut.

But will Microsoft still have to raise its bid to get Yahoo? The company is doing its best to avoid it. Microsoft Chairman Bill Gates pointed out that Yahoo hasn't gotten any better deals, telling the Associates Press this week: "We think that's a fair offer. They should take a hard look at it."

Indeed, Microsoft has a lot to lose by raising its bid too far. Even offering an extra $1 per share would cost about $1.4 billion, whereas waging a proxy fight would cost only about $30 million, one insider said. And since some large Microsoft shareholders already feel that the company is overpaying for Yahoo, it's no surprise that executives aren't waving more dollar bills around.

There's still a good chance that Microsoft will end up paying a little bit more before the Yahoo deal closes, but there's an art to these negotiations. If Microsoft offers to raise its offer too soon, it risks getting into a bidding war with itself -- Yahoo shareholders might hold out in hopes of squeezing out a few more billion dollars. But if it waits until the deal seems sure to close and then sweetens the bid, Microsoft could end up looking like a benevolent conqueror.

It could be good for Microsoft to raise its bid at least a little, and leave Yahoo shareholders and employees with something extra to feel happy about. And it's worth noting that for all the bluster, Microsoft hasn't ruled out paying a little more to seal the deal.

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