Microsoft to Get Tough With Yahoo

Wall Street expects Microsoft to enter a protracted period of "trench warfare" in its attempt to buy Yahoo after the failure of its three-month-long attempt to bring the online company's board to the negotiating table.

It is expected to launch a proxy battle and try to oust the Yahoo executive team while encouraging investors to accept its original $31-a-share offer, with the first shot fired possibly as early as this week.

With the passing, on Saturday, of the deadline that Microsoft had set Yahoo to enter into negotiations without any comment from either side, shares in both companies declined yesterday, valuing Microsoft's bid at about $42.7bn.

Microsoft's chief financial officer, Chris Liddell, warned last week that if Yahoo had not started talking by Saturday the company would examine its alternatives. "These alternatives clearly include taking an offer to Yahoo shareholders or withdrawing our proposal and focusing on other opportunities," he said.

The vast majority of Wall Street followers of the giant software company do not believe that the company will walk away. Scott Kessler, a technology analyst at Standard & Poor's in New York, said he expected Microsoft to name a slate of proposed directors to Yahoo's board within days, kicking off an intensive battle for shareholders' votes.

"This is something Microsoft has been thinking about and working towards for the better part of two years," said Kessler, who sees no reason for the Seattle-based company to back down on its explicit threat to seek control. "Microsoft's the kind of company that says what it does and does what it says."

Disappointing earnings figures from Microsoft last week prompted questions about whether the Windows software firm is in sufficiently hearty health to succeed with a hostile bid. But conversely Kessler said Microsoft's sluggish performance made the takeover all the more crucial.

"Yahoo's more critical to Microsoft than people might have thought," he said. "I think they've been surprised and pretty frustrated by the fact that they've really got nowhere."

Jupiter Research analyst Michael Gartenberg said Yahoo's management would be vulnerable if no deal materialized: "Yahoo is going to be under extraordinary pressure to deliver, having turned down an opportunity such as this."

Yahoo has a possible defence in the form of a "poison pill", a mechanism that would trigger the bargain sale of new Yahoo stock to other shareholders if any company were to build a stake of over 15%.

This was introduced by Yahoo in March 2001 as a "stockholder rights plan". Last year it said that because the poison pill would dilute the share ownership of a predator, it "could make it more difficult for a third party to acquire us without first negotiating with our board of directors".