Just as the writer’s strike seems poised to end, another complex negotiation may be about to get even more intense. The Wall Street Journal is reporting Yahoo’s Board of Directors is set to reject Microsoft’s $44.6b takeover offer as soon as Monday.
According to the report which cites a “person familiar with the situation” as its source: Yahoo’s board has concluded from initial discussions that Microsoft’s $31 per share offer “massively undervalues” the company. They believe the offer is an opportunistic effort to take advantage of recent weakness in the stock market, and Yahoo’s stock price in particular.
In what may be a negotiating ploy aimed at raising the price, the Journal’s source notes that the company is unlikely to consider any offer below $40 a share. That would raise the deal value by more than $12b to more $56b.
Additionally, a higher price does not address one of Yahoo’s other apparent concerns: insufficient provisions for regulatory rejection and a related break-up fee. At issue is a scenario where a U.S. or EU regulatory agency rejects a deal the companies agree to. If that happens, Yahoo’s board believes the exposure of Yahoo’s Intellectual Property to a competitor (Microsoft) and the financial costs of moving forward, could significantly hurt Yahoo’s future operations. In the interest of shareholders, they want to insure that, price notwithstanding, deal terms such as a regulatory triggered breakup fee are there to provide a financial remedy.
The numbers for a reverse break-up fee (which is the fee that will be paid by the buyer if a deal falls apart) of this kind would not likely be small. For perspective, when private equity firms KKR and Texas Pacific struck a deal to buyout power company TXU for $31.8b, the “reverse breakup fee” was $1b. When credit card processor First Data was acquired for $29b, the reverse breakup fee was $700m (data source: FactSet MergerMetrics).
At upwards of $44b, Microsoft’s bid for Yahoo could easily have similarly large fees. Microsoft may not be willing to gamble hundreds of millions of dollars, even potentially more than a billion dollars, on the risks of regulatory approvals.
If a higher price and these kinds of deal terms can’t be agreed upon, one of Microsoft’s alternatives is to escalate their efforts on Wall Street and attempt to go around the board of directors in a truly hostile takeover could be equally, if not more, costly. Yahoo’s corporate formation documents include “poison pills” and other anti-takeover measures. Microsoft would have to gain majority shareholder support and likely elect a new board of directors to break the log jam.
Proceeding without management support could have additional negative consequences too. Tech companies, like Yahoo, rely heavily on their corporate culture and engineering talent for success. Hostile takeovers, which by definition lack management support, pose a significant risk of damaging that intellectual capital and scarring the heart of the very assets Microsoft is hoping to acquire: Yahoo’s staff.
If the Wall Street Journal’s report is accurate, things could soon get a lot more complicated.
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