Yahoo fends off Microsoft
San Diego, CA - May 6, 2008
Bainbridge quoted in recent Financial Week article
Tick, tick, tick...ka-boom!
Some claim Yahoo pitted employees against shareholders to help fend off Microsoft
By Andrew Osterland, Financial Week
May 5, 2008
Microsoft CEO Steve Ballmer didn't go medieval as threatened on Yahoo management last week for refusing to discuss his offer to buy the company. Instead, Mister Softee simply rode on, apparently galled by Yahoo's insistence that he raise Microsoft's offer for the search engine specialist.
Mr. Ballmer, who reportedly grew irate a few weeks ago when a Yahoo director suggested the company was worth $40 a share, indicated to his employees last Thursday that he was still considering a deal-friendly or not-rather than walking away from his sour courtship of Yahoo.
But in the end, Yahoo's reported asking price turned out to be too rich for even Microsoft's considerable means.
While Yahoo CEO Jerry Yang successfully defended the company he built. he may be dealing with the now-kaput offer from Microsoft for years. Indeed, the Yahoo board's efforts to thwart Microsoft's advances have already spawned at least two investor suits claiming directors breached their fiduciary duty to shareholders in rebuffing Mr. Ballmer. What's more, in their defenses against Microsoft, Mr. Yang and the board arguably pitted the interests of Yahoo employees against those of Yahoo shareholders, say plaintiff's lawyers.
A lawsuit filed in late February on behalf of two Detroit pension funds that own Yahoo stock is now playing out in the Delaware Chancery court. It accuses the Yahoo board of failing to act in the interests of shareholders by refusing to negotiate with Microsoft about a deal. A key issue in the shareholder suit is an employee retention plan adopted by the Yahoo board shortly after it rejected Microsoft's $31 bid. The plan, which would kick in on a change of control at the company, grants "golden parachute payments to every single Yahoo employee," according to the filed complaint. It also provides for accelerated vesting of all employee stock options and restricted stock, and grants them broad "walk away" rights to leave the company and still collect big severance checks.
Contracts aimed at protecting key personnel at target companies in acquisitions are common, but this is an über retention plan that "applies to every janitor, every file clerk, every secretary, every security guard-everybody," said Bouchard Margules & Friedlander partner David Margules in a teleconferenced court hearing in late March. Mr. Margules represents plaintiffs in the case. The total cost of the plan to Microsoft or any other acquirer of Yahoo could reach $3 billion, or more than $2 per Yahoo share, according to plaintiff estimates.
"This isn't about employee retention. This is a poison pill," said Mark Lebovitch, a partner at Bernstein Litowitz Berger & Grossman who serves as lead counsel for the plaintiffs. Yahoo also has a shareholder rights plan that would deter any hostile bidder from accumulating more than 15% of Yahoo stock. "The [retention] plan provides a huge incentive for Yahoo employees to walk away on a change of control, and it presents real integration problems" for potential acquirers of the company, said Mr. Lebovitch.
Not only does the plan increase the cost of cutting the Yahoo work force of 14,000, it also raises the price required to keep key employees. If Mr. Ballmer ever contemplated making a higher bid for Yahoo, the cost of the retention plan currently in place no doubt limited his willingness to raise the price, say analysts. In other words, Yahoo employees' gains would be Yahoo shareholders' pain.
"The Yahoo board created an incentive for employees to leave that would decrease the value of the asset after acquisition," said Nick Chini, managing principal of M&A advisory shop Bainbridge. "Microsoft [had] to factor that into its valuation model. If I were a Yahoo shareholder, I wouldn't be happy." Among other things, the shareholder suit seeks to invalidate the retention plan.
Mr. Lebovitch hopes to get an expedited trial schedule and is currently trying to depose the chairman of Yahoo's compensation committee, Arthur Kern. Not surprisingly, Yahoo is in no rush to make him available. The company claims that Mr. Kern, who was married on March 1, has postponed his honeymoon because of his responsibilities to Yahoo. He now plans to spend five weeks abroad with his new wife and would not be available for deposition until next month.
In the meantime, Microsoft management will be drawing up a new strategy. In a letter to employees obtained by Reuters, Mr. Ballmer elaborated on what the next step for Microsoft would be.
"Ultimately, our goal is to build the industry-leading business in search, online advertising, media, and social networking," Mr. Ballmer wrote in a Saturday letter to employees, obtained by Reuters.
"Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services," Mr. Ballmer wrote, "I remain confident that we can achieve our goals without Yahoo."
If so, Yahoo will likely be hearing from a few more of its shareholders.
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