It's On! Microsoft to Escalate Fight for Yahoo!

Microsoft has moved into Defcon 1 mode in its hostile takeover bid for Internet giant Yahoo!, by hiring a proxy solicitation group to help it oust Yahoo!'s board of directors. This course of action was considered a long shot when Microsoft began its pursuit of Yahoo!, but with Yahoo!'s current board voting unanimously to reject Microsoft's $44.6 billion offer for the company, the software giant apparently felt it had few other choices.

The timing of Microsoft's bid to oust Yahoo!'s board isn't coincidental: The entire Yahoo! board is up for reelection in March, so Microsoft could conceivably entice enough of Yahoo!'s biggest shareholders to eject the board members and elect a board that would accept Microsoft's original takeover offer.

While doing this is risky--overthrowing the Yahoo! board could cause key Yahoo! engineers and executives to flee the company--it's also dramatically less expensive than raising its buyout offer. Analysts say Microsoft will likely spend $20 million to $30 million on this effort, compared with the $1.4 billion it would need to spend each time it raised its buyout offer by $1 a share. Microsoft Chairman Bill Gates said last week that his company wasn't interested in raising its bid for Yahoo!.

That said, Microsoft could still opt to raise its offer, if only to retain key Yahoo! employees. The threat of a board overthrow may be enough to prove to Yahoo! that Microsoft is serious about its desire to purchase the company and won't be denied. Microsoft has said publicly that it plans to offer lucrative retention packages to key Yahoo! engineers and executives, though it has not said how many jobs would be lost if the companies were combined.

Meanwhile, Yahoo! has introduced new severance plans to protect employees in the event of a Microsoft takeover of the company. These plans provide up to two years of severance pay, depending on the employee's job level.

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