Introduction
In 2008, Microsoft offered to acquire Yahoo at $31 per share. The acquisition was to be settled through the transfer of all shares including outstanding. The acquisition price of $31 per share amounted to a takeover price of $44.6 billion. Half of the sum was to be paid in cash, another half was to be exchanged for Microsoft shares after the bid was accepted. Microsoft was to acquire Yahoo’s shares at a 62 percent premium considering the closing prices of stocks in January 2008. According to Fernandez (2008, 37), the acquisition was motivated by the growing need to increase online advertisements to build up its competitive advantage with Google.
Proxy war between Yahoo and Microsoft
The acquisition was seen as a strategic advantage that would allow Microsoft to minimize advertisement costs by providing a low-cost platform. Microsoft intended to combine both entities to create a competitive advantage. Microsoft had offered Yahoo shareholders to pay half of the consideration in cash and the other half through the acquisition of Microsoft shares. Managers believed that Microsoft and Yahoo combined could create the company to compete with Google. This was not the first time Microsoft had shown interest in acquiring Yahoo. For instance, in May 2007, Yahoo disclosed that Microsoft had proposed a friendly takeover that was rejected by directors. The online market has been increasing at a significant pace. For example, the market had increased from $40 billion in 2007 to $80 billion in 2010 (Atanassov 2013 1098).
The benefits associated with online advertisement where Yahoo has a considerable market share is the primary motivating factor for this acquisition. Google highly dominates online advertisement. The only way Microsoft could remain competitive is to acquire Yahoo and its market share. Both companies can be able to develop a competitive advantage. Moschetto (2015 35) believes that a significant value can be created by combining their media assets. Microsoft CEO believes that both companies can take advantage of their experience and technological expertise to improve performance in order to gain competitive advantage. Yahoo has suffered decreasing revenues, which has brought its shares down to $10 per share. Moreover, it would allow both companies to improve operational efficiency by eliminating redundant costs. This would also allow Microsoft to concentrate on improving innovation in emerging markets such as videos and mobile phones. Microsoft CEO believes that the combined businesses would create an entity with annual revenue of more than $1 billion. After a historic attempt to acquire Yahoo, Microsoft decided to abandon its acquisition bid. However, before they did it, Microsoft had threatened to turn it into a proxy war to force Yahoo to accept the deal.
Why Microsoft fought a proxy war
The proxy war was propelled by continuous frustration by shareholders due to declining share prices (Humphery-Jenner 2014). Investors joined forces with Microsoft to allow a takeover. According to Yahoo, shares of the company were worth $ 37 per share; this offer was rejected by Microsoft arguing the price was too high to accept. Microsoft initiated a proxy fight with Yahoo by nominating those Yahoo’s directors who supported the takeover bid. Microsoft even went ahead to quash Wall Street speculations so they would raise their offer to acquire Yahoo. Microsoft Chief Executive Steve Ballmer believed that an initial direct offer to Yahoo’s shareholders would have undesired consequences on the value of the company. The only option available for Microsoft was to make a hostile takeover bid by initiating a proxy war on the board. Microsoft had proposed to nominate Yahoo directors since it had a staggered board who would vote to allow a 50.1 percent shares takeover (Gorbenko and Malenko 2014 2532). This would leave Yahoo managers only one option – to accept the bid at its current share valuation of $31 per share. However, this decision would have been met with hostility because Yahoo had had a ‘poison pill’ that would have made it expensive to acquire shares directly from investors.
Advantages and disadvantages of a proxy fight
Result of proxy fight
After Yahoo investor’s failure to succeed in their proxy fight with management, most shareholders left their share for Google and Facebook. The proxy fight at Yahoo has resulted in frustration and investors can no longer trust the management and the board. For instance, Ryan Jacob, who manages Yahoo shares, argues that they do not trust managers and they would reject any management proposal to invest $25 billion stakes in Alibaba Group Holding (Branch and Yang 2010 7).
Bibliography
Atanassov, Julian. 2013. “Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting.” Journal Of Finance 68, no. 3: 1097-1131.
Branch, Ben, and Taewon Yang. 2010. “The Performance of Merger / Risk Arbitrage and Sweetened Offers in Hostile Takeovers.” Banking & Finance Review 2, no. 1: 1-14.
Fernandez, Joe. 2008. “Microsoft refutes Yahoo! takeover claims.” Marketing Week 31, no. 45: 37.
Gorbenko, Alexander S., and Andrey Malenko. 2014. “Strategic and Financial Bidders in Takeover Auctions.” Journal Of Finance 69, no. 6: 2513-2555.
Humphery-Jenner, Mark. 2014. “Takeover defenses, innovation, and value creation: Evidence from acquisition decisions.” Strategic Management Journal 35, no. 5: 668-690.
Moschetto, Frédéric. 2015. “An anti-takeover strategy by limitation of voting rights: A Yahoo and Microsoft model and a numerical approach.” Management International / International Management / Gestión Internacional 20, no. 1: 52-66.