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Apr. 23, 2008

Yesterday, Microsoft CEO Steve Ballmer said his company wouldn’t raise its $43 billion bid for Yahoo no matter how well the search engine performed in its latest quarter. The numbers were made public about an hour later.

To win the bid, Microsoft must increase and sweeten its offer price to shareholders if it wants to finalize a deal with Yahoo.

To be sure, Ballmer is weighing all his possible options: Go hostile or send a couple billion more at Yahoo, which has twice rejected its original offering price per share.

“We think we can accelerate our search strategy by acquiring Yahoo and will pay what makes sense for our shareholders,” Ballmer said before the earnings report late yesterday.

For its part, Yahoo CEO Jerry Yang said that his company wasn’t interested in a deal unless it was offered a lot more money. Microsoft’s No. One takeover target has until April 26 to accept the bid that would buy out Yahoo at slightly less than $30 a share or else face a costly and potentially "bloody" proxy fight.

Yang let Microsoft know he wasn’t going to be the first to back down. Yang repeatedly said to reporters the deal “substantially undervalues” Yahoo and that he will continue to do whatever it takes to make a deal that will fully satisfy Yahoo's shareholders.

“Our executive board and management team continue to be open to any and all alternatives, including a sale to Microsoft,” said Yahoo's CEO.

On the call, Yang and president Sue Decker insisted that the company’s headed in the right direction and moving the whole thing forward. Yahoo offered its latest numbers as a final defense to its shareholders that it’s worth a lot more than Microsoft is offering shareholders.

Overall, Yahoo posted earnings per share of eleven cents, beating analyst forecasts by two cents. Its revenues, which exclude money it shares with advertising partners and its so-called TAC (traffic acquisition costs), grew 14 percent to $1.35 billion to come in $20 million ahead of the Wall Street's estimates.

Additionally, Yang underscored Yahoo’s display advertising revenues which increased 25 percent from 2007's levels and praised the company for its highly satisfactory quarter, calling it “impressive” under the circumstances.

However, those estimates weren’t too difficult to beat given that Street analysts had started with much lower expectations to begin with. Yahoo also didn’t change its guidance for 2008 on annual revenues of $7.2 billion to $8 billion, which analysts originally considered it a weak forecast when it was issued four months ago at the beginning of the year.

Some analysts are now saying that Yahoo is trying to work to get more time in its favor. “Yahoo puts in numbers slightly better than expectations and wants a little more time to pursue alternatives... Of course, this is time Microsoft doesn’t want them to have in any way, which means they will have to boost their offer to win investors' aggrement,” says Youssef Squali, an analyst with Jefferies.

Legally speaking, as of April 26, Microsoft has the green light in going forward with its hostile takeover. It has already hired Innisfree Mergers & Acquisitions to help it oust Yahoo’s 10-member board, but that option could create a very negative environment with Yahoo’s executives.

Yahoo has reported that it already spent $14 million in the first quarter to ward off the software giant.

Yang said the company is still exploring “strategic alternatives” as Microsoft decides its next move. Today in fact, Yahoo ends its two-week period to use Google’s search advertising. Sue Decker said the tests are still “premature.” Yahoo is also in talks with Fortune’s parent Time Warner to strike a potential partnership with AOL.

That means Microsoft is left with only one alternative and that is to increase and sweeten its offer to Yahoo shareholders. Analysts have suggested an offer between $31 to $35 a share would be a reasonable price to pay. “If I’m a Yahoo shareholder looking at Yahoo’s performance and Microsoft as a potential buyer, I would think Microsoft is going to come in and increase its bid,” Squali says.

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Source: Jefferies.