Proxy battle looms between Microsoft, Yahoo

Microsoft Corp. is getting ready to take its bid for Yahoo right to the web portal's shareholders, even as analysts wait for a higher offer.

Separately, Yahoo Inc. adopted new severance packages that protect employees in the event of a Microsoft takeover.

Microsoft has hired proxy solicitation group Innisfree M&A Inc. to help oust Yahoo's 10-member board, all of whom are up for re-election this year.

A source close to the deal who is not authorized to speak publicly about it said Tuesday that Microsoft could spend $20 million US to $30 million US on that effort.

That's much less than the $1.4 billion US each one dollar uptick in Microsoft's bid would cost. Microsoft's offer two weeks ago was originally worth about $44.6 billion, or $31 a share. Based on Microsoft's closing share price Tuesday, the offer is now worth about $40 billion.

The Redmond, Wash.-based software maker's board plans to authorize a proxy battle this week, according to The New York Times DealBook blog. It has until March 14 to nominate a slate of directors for Yahoo. Microsoft and its advisers declined to comment.

Nosigns Microsoft willraise bid

Election results would be announced at Yahoo's annual meeting. Last year's was held in June.

Microsoft also may simultaneously circumvent Sunnyvale, Calif.-based Yahoo's management and ask shareholders to sell their stock to Microsoft directly.

So far, Microsoft has given no signs it will raise its bid, even though a person familiar with earlier talks between the two companies said Microsoft was willing to pay at least $40 per share for Yahoo a year ago. That person spoke on condition of anonymity because the offer was never made public.

In an interview with the Associated Press Monday, Microsoft chairman Bill Gates said the software maker was not talking to Yahoo about raising its bid.

Analysts, however, still believe there's wiggle room.

"I don't think what they're saying now precludes" a higher offer, said Sanford C. Bernstein & Co. analyst Charles DiBona.

DiBona also said he thinks Microsoft would prefer not to go hostile but will if no progress has been made by the March deadline.

Severance issues cloud takeover

Yahoo reiterated Tuesday that its board is "carefully and thoroughly evaluating all of the company's strategic alternatives."

The web portal and search company's new severance plans to take effect if Microsoft succeeds in its takeover bid cover Yahoo's top executives and all full-time employees.

The plans are designed to keep workers on board even if the company changes hands. They also could make it harder for Microsoft to move Yahoo staff to Redmond and raise the overall cost of integrating the two companies.

In an e-mail to employees last Friday, Yahoo chief executive Jerry Yang wrote that the severance plans "shouldn't be construed as any indication that a change in control might or might not take place."

The company said in a Securities and Exchange Commission filing Tuesday that workers who lose their jobs without "cause" or quit "for good reason," as Yahoo defines it, would continue to receive their salary and medical benefits for four to 24 months, plus reimbursement for "outplacement services" for two years.

A Yahoo spokeswoman would not say what might constitute good reason.

Ongoing battle over company's value

Departing employees' stock options would also vest faster than scheduled under the new plans.

Microsoft has said it will offer significant retention packages to Yahoo engineers and other key employees, including some executives. The software maker has not said how many jobs could be cut if the companies combined.

Yahoo's board spurned Microsoft's bid last week, saying it "substantially undervalues" Yahoo's assets.

Microsoft fired back that its offer was "full and fair," and that it would "pursue all necessary steps" to get the deal done.

Shares of Microsoft slipped 14 cents to close at $28.17 US, while Yahoo's stock fell 65 cents, or 2.2 per cent, to close at $29.01 US.