Yahoo's big gamble

March 6, 2008: 10:59 AM ET

By Yi-Wyn Yen

It's been more than a month since Microsoft announced its initial bid to buy Yahoo for $44.6 billion. That's led to a lot of speculations and rumors about what is and isn't happening. But one thing is certain. Yahoo isn't ready to shake hands with Microsoft yet.

Wall Street widely believes that a marriage between the two Internet frienemies is inevitable, but Yahoo (YHOO) says it needs more time to consider its options. In its boldest move since Yahoo's board unanimously rejected Microsoft's offer, the company pushed back the March 14 deadline to nominate Yahoo's board members. On Wednesday, Yahoo said it will extend the deadline to nominate the board to 10 days after it sets a date for its annual stockholder meeting.

The general consensus is that Yahoo made the move to stymie Microsoft (MSFT), which is thought to be plotting to nominate board members who would vote in favor of the bid. Yahoo has not set a date for its next annual stockholder meeting, which coincides with the board nomination. It could push the date as far back as July 12 if it chooses. (Yahoo is required to hold a stockholder meeting within 13 months of its last one by Delaware law.)

Both parties now have more time to come up with their next move, but for Microsoft, time is of the essence. Microsoft wants to move forward as soon as possible to mount a challenge to Google (GOOG). The search giant is expected to get the final approval it needs from European regulators to buy DoubleClick, a major online ad company, as early as next week. Microsoft has argued in the past that a Google-DoubleClick merger would give Google too much of a monopoly in the online ad business.

By stalling, Yahoo is placing a big bet that it can hold out for a better offer from another suitor or get a higher offer from Microsoft. Yahoo is reportedly back in talks with AOL (TWX) and News Corp (NWS). Executives from Microsoft insist its original buyout offer of $31 per share is fair.

But waiting too long may not be a good idea for Yahoo. Many analysts believe the majority of shareholders would back a Microsoft merger over the alternatives Yahoo is pursuing. Yahoo's stock has risen nearly 50% in value since Microsoft announced its unsolicited offer on Feb. 1.

"It's been a month since Microsoft announced its bid, and still nothing. Every week that goes by, you ask the same question on Friday afternoon, 'What's Yahoo going to do?' And then Monday morning comes with no news," said Martin Pyykkonen, an analyst with Global Crown Capital. "So far, there really hasn't been any shareholder ill will. Over time, the discontent will get greater."

Yahoo CEO Jerry Yang sent an e-mail (written entirely in lower case) to his employees explaining the delay. He wrote, "this change removes an imminent deadline. microsoft, of course, could still choose to name directors, but our objective here is to enable our board to continue to explore all of its strategic alternatives for maximizing value for stockholders without the distraction of a proxy contest."

In other words, the best shot Yahoo believes it has is to buy time. "I can't think of any reason why they'd want Microsoft to nominate a board now," says Gary Reback, an antitrust lawyer who represented PeopleSoft during Oracle's hostile takeover. "Once things happen, you can't go back."

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