Sizing up Microsoft and Yahoo: Did anybody win?

Microsoft did the smart thing, while Yahoo needs to act fast or face shareholder wrath, analysts say

Now that Microsoft has dropped its bid to take over Yahoo, industry analysts assessed what happened and what to expect from the two companies.

Microsoft gave up its effort to acquire Yahoo because the software company decided it wasn't worth the cost and potential negative publicity involved with a proxy fight, said Marc Edelman, a law professor at New York Law School and a former antitrust lawyer, in an e-mail. Either that, or Microsoft figured it couldn't win in a proxy fight, he said.

In the coming weeks, however, Edelman said it's likely that Microsoft will increase the pressure on the US Department of Justice to investigate the proposed advertising joint venture between Yahoo and Google.

"If the DOJ does not act vigilantly, I would not be shocked to see Microsoft file a suit itself," he said.

Microsoft strategy didn't work

Rob Enderle, principle analyst at Enderle Group, said Microsoft's initial strategy was to overbid its offer so the company could close the deal with Yahoo quickly. (Microsoft on February 1 offered US$44.6 billion in cash and stock, a 62 per cent premium over Yahoo's closing price at the time.) However, Enderle noted, Microsoft didn't leave Yahoo's board with an option that allowed it to exit the process looking like it had negotiated strongly.

"The end result was that the two sides couldn't come together," Enderle said in an e-mail. "Given what we know of Google and its ability to manipulate situations that favor it, it wouldn't surprise me if [Google] had something to do with how badly this went. However, Google wanted the two firms focused on each other and not on Google, [but] Microsoft's exit ends that." Meanwhile, Enderle said, Yahoo now has a serious problem because the company's shares could tank, and angry shareholders may pursue a lawsuit.

"[Yahoo] will need to come up with a plan quickly to increase the perception of value for the firm and to take the pressure off the executive staff and board," he said. "The board is up for election, and this won't bode well for them."

Conversely, Microsoft will most likely be rewarded for walking away from the acquisition because the market didn't like the deal, Enderle said.

"Microsoft couldn't really afford the distraction of a merger anyway, and its financials reflect that," he said. "In addition, the merger attempt opened up opportunities with News and Time Warner that may have not existed before and may actually turn out to be both less risky and, in the end, more lucrative than [a deal with] Yahoo would have been. We'll see, but I expect Microsoft will be spending some time looking into what Google was doing while it was distracted."

Because Microsoft was unable to persuade Yahoo's leadership to accept its final offer, Microsoft's leaders decided that pursuing a hostile takeover was not in the company's best interest, said Andrew Frank, an analyst at Gartner.

Quick action needed from Yahoo

"Yahoo must now demonstrate to its shareholders that its directors' insistence that the offer undervalued the company was justified," he said in an e-mail. "Meeting this challenge will require bold steps, both in continuing to innovate its own platforms, and cultivating new partnerships and acquisitions that can have a significant near-term impact on Yahoo's performance and perceived value."

Henry Blodget, CEO and editor in chief of the "Silicon Alley Insider" business news Web site, also predicted that Yahoo's stock will drop and that Microsoft's will rise in the aftermath of Microsoft's decision to yank its offer.

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Linda Rosencrance

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