Microsoft Threatens Hostile Yahoo Bid

Microsoft could launch a hostile bid for Yahoo next week if the internet company does not start talks this weekend.

The software group warned last night that it will not be raising its $31 (£15.60) a share offer if it does approach shareholders directly, as it announced a drop in quarterly sales of its flagship Windows software.

"With respect to Yahoo, we have been clear; speed is of the essence," said Microsoft's chief financial officer Chris Liddell on a call with analysts. "The idea that we should increase our bid just because we can afford to is not one that I favour. Unless we make progress with the Yahoo board by this weekend, we will explore our alternatives.

"These alternatives clearly include taking an offer to Yahoo shareholders or withdrawing our proposal and focusing on other opportunities," he added. Such opportunities could include other deals or partnerships.

Microsoft chief executive Steve Ballmer set Yahoo's board a deadline of three weeks to come to the table or face a hostile takeover. That deadline ends tomorrow.

Since Microsoft first went public with its approach to Yahoo, earlier in the year, the internet company has maintained that the bid undervalues its prospects. The cash and shares offer, pitched at $31 a share, currently values Yahoo at about $44bn.

Liddell said yesterday that Yahoo is expressing "unrealistic expectations of value".

"Yahoo continues to lose search share and profit continues to decline year on year,'' he added.

Microsoft's first quarter results, meanwhile, showed the importance of getting a better position in the online advertising market and especially in the lucrative area of search advertising, which Google dominates.

Over the last three months - Microsoft's third quarter - the company's internet operations saw losses increase to $228m from $171m in the previous year. Sales increased to $843m from $603m the previous year but were actually down about $20m on the previous quarter. The year-on-year comparison has been boosted by Microsoft's acquisition of online advertising player aQuantive; excluding that deal, revenues were actually up only 29% on the same quarter in 2007.

In contrast, Google's revenues for the quarter - just from its own search sites - were $3.4bn, 49% up on the same quarter last year and 9% better than the previous three months.

Sales of Windows over the three months were $4.03bn. That was down on the $5.27bn recorded in the same quarter last year, when sales were distorted by delays in releasing Windows Vista and Office 2007, and several hundred million dollars less than many on Wall Street had expected. Microsoft said the drop-off was due in part to increased software piracy, especially in some developing markets.

Overall, Microsoft's third quarter results were actually slightly better than Wall Street had expected. Third-quarter profits were down 11% at $4.4bn, with revenues largely unchanged at $14.5bn, but the drop was less than feared.

Analysts, however, were unimpressed with Microsoft's guidance for the current and final quarter of its financial year. For the three months to end June, Microsoft expects earnings per share of $0.45 to $0.48 with revenues of $15.5bn to $15.8bn. Wall Street had been looking for the top end of that profit range. Shares in the company were marked as much as 5% lower last night.

But Microsoft also released a generally positive forecast for the coming financial year, saying it expects earning per share for the year to end June 2009 to be between $2.13 and $2.19 per share, well above what Wall Street had been factoring, on revenues of $66.9bn to $68bn, also better than analysts had been forecasting.