Yahoo Drops Most in 2 Years as Microsoft Scraps Bid (Update10)

Yahoo Drops Most in 2 Years as Microsoft Scraps Bid

May 5 (Bloomberg) -- Yahoo! Inc. fell the most in almost two years on the Nasdaq after Microsoft Corp. abandoned a $47.5 billion takeover of the Internet-search company because executives couldn't agree on a price.

Yahoo was cut to ``sell'' by Citigroup Inc. and ThinkPanmure LLC analysts and the stock dropped as much as 20 percent. Microsoft Chief Executive Officer Steve Ballmer said on May 3 he wasn't prepared to pay the $37 a share Yahoo executives demanded. Microsoft, the world's biggest software maker, offered $33.

The move puts Yahoo CEO Jerry Yang under pressure to bring the share price near the $31 Microsoft first offered. Sunnyvale, California-based Yahoo, owner of the No. 2 search engine, fell 32 percent in the year before Microsoft's offer. Bigger rival Google Inc. expanded revenue more than three times faster than Yahoo last quarter.

``Google is coming on strong on all fronts, and Yahoo has to figure out a game plan to keep from getting swallowed up,'' Endpoint Technologies Associates President Roger Kay said in an interview with Bloomberg Radio. ``Yahoo has to pick up the pieces and march forward with what it has in hand.''

Yahoo fell $4.30, or 15 percent, to $24.37 at 4 p.m. New York time, the most since July 2006. That price is still 27 percent higher than Yahoo's stock close of $19.18 before the offer.

The company is in talks over a search-advertising arrangement with Google, said two people familiar with the matter. An agreement could come as soon as this week, according to one of them.

Time Warner Deal?

Yahoo also is in discussions with Time Warner Inc. over a merger with its AOL unit. The proposed deal would see Time Warner keep a stake of less than 20 percent of the combined company, the people said. The tie-up probably would occur after the Google deal, and wouldn't be precluded by it, they said.

Redmond, Washington-based Microsoft fell 16 cents to $29.08, while Google advanced $13.61 to $594.90.

``Yahoo is going to be under a lot of pressure,'' said Peter Falvey, managing director at Boston-based technology-merger adviser Revolution Partners. ``A lot of shareholders are going to say, `Hmm, maybe we overreached.'''

Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware in Newark, called Yahoo's rejection of the offer ``too bad'' for investors, saying today's stock drop indicates they viewed the price as fair.

``I've always believed the shareholders should have the ultimate voice in a takeover,'' Elson said. ``The shareholders can always vote to replace the Yahoo board who turned this offer down.''

Rejection

Ballmer and deputy Kevin Johnson met May 3 in Seattle with Yahoo co-founders Yang and David Filo, two people familiar with the talks said. Yang and Filo refused to accept less than $37 a share and flew back to California. Ballmer called Yang to inform him of the decision just before it was announced, the people said.

Yahoo Chairman Roy Bostock reiterated over the weekend in a statement that Microsoft's offer wasn't enough. The company will continue to expand search advertising sales while improving its display advertising business, he said.

``With Microsoft's withdrawal, we'll be better able to focus our energy on growing our industry leadership and maximizing value for stockholders,'' Yang, 39, said yesterday in a blog post. ``We'll continue to execute on our plan.'' He also said the company will keep exploring options to increase its value.

Yang's Defense

Yang had argued the company's rank in the U.S. search market and its Asian operations warranted a higher bid. He considered a combination with AOL and tested advertising software from Google. Last week, a person familiar with the matter said Yang might agree to a broader deal with Google.

``Both sides reported that the trial went very well,'' Jeffrey Lindsay, an analyst at Sanford C. Bernstein in New York, said yesterday in a Bloomberg Television interview. ``It would strongly suggest to us that they do have something in the works with Google.'' Bernstein rates Yahoo shares ``market perform.''

Ballmer, 52, had set an April 26 deadline for Yahoo to come to terms and as the days passed, it seemed possible he would take the offer straight to Yahoo investors. Over the weekend, Ballmer said he won't do that. That would result in a ``protracted proxy contest,'' and Yahoo indicated it would make decisions that Microsoft would find ``undesirable,'' Ballmer said.

If Yahoo agrees to use Google's search advertising, it would lose its own ad customers and engineers who work in that field, Ballmer said.

Competition

Yahoo already had a ``poison pill'' anti-takeover defense and a severance plan that would compensate any employee displaced by an acquirer.

Yahoo has failed to keep pace with Google. While Yahoo's sales climbed 14 percent last quarter, Google posted growth of 46 percent. Yahoo and Microsoft remain a distant second and third behind Mountain View, California-based Google in Web searches.

UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor magazine, has said that Microsoft could come back and buy Yahoo later on if it walked away this time. Microsoft may approach Yahoo again in three to six months, said Robert Breza, an RBC Capital Markets analyst in Minneapolis.

Oracle Corp., the third-biggest software maker, initially abandoned its bid for BEA Systems Inc. after BEA asked for 24 percent more than Oracle's $17-a-share bid. The two companies agreed to the buyout three months later at $19.38 a share.

``To say we are disappointed is an understatement,'' William Morrison and Robert Coolbrith at New York-based ThinkPanmure wrote in a report yesterday. Rejecting Microsoft's offer is ``likely to go down as one of the more destructive decisions for shareholder value in the history of Internet stocks.''

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