The company was responding to a letter from Microsoft that threatened to lower the price of its buyout offer and take it directly to Yahoo shareholders.
Although Microsoft’s offer was initially valued at $31 a share, a drop in the price of Microsoft shares has reduced the offer to just more than $29 a share.
Microsoft’s chief executive, Steven A. Ballmer, raised the pressure on Yahoo’s directors on Saturday in a letter warning that Microsoft would begin a proxy fight seeking to oust them if the two companies did not reach a negotiated deal in the next three weeks.
“Our board’s view of your proposal has not changed,” Yahoo said in a statement. “We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders. Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo. Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal.”
The statement added: “We consider your threat to commence an unsolicited offer and proxy contest to displace our independent board members to be counterproductive and inconsistent with your stated objective of a friendly transaction. We are confident that our stockholders understand that our independent board is best positioned to objectively and knowledgeably evaluate our company’s alternatives and to maximize value.”
Senior executives from the companies have met on two occasions since Microsoft made its offer public on Feb. 1, but they have not entered formal negotiations. Yahoo rejected Microsoft’s offer, saying it “substantially undervalues” the company.
“We are open to all alternatives that maximize stockholder value,” Yahoo said in its statement. “To be clear, this includes a transaction with Microsoft if it represents a price that fully recognizes the value of Yahoo on a standalone basis and to Microsoft, is superior to our other alternatives, and provides certainty of value and certainty of closing.”
Yahoo’s board has asked Microsoft for information on antitrust issues and other matters but feels frustrated by Microsoft’s lack of response, according to people involved in the discussions, who were granted anonymity so they could discuss the confidential maneuvering.
For its part, Microsoft has insisted it sees no reason to raise its bid, because Yahoo, which has discussed alternative deals with other companies, has no competing offers.
“Basically Microsoft infers that Yahoo has no alternative deals in the offing, therefore there is no need to raise its price,” said Michael Klausner, a Stanford Law School professor who specializes in corporate law and governance. “Microsoft still prefers a negotiated deal to a proxy fight.”
Mr. Ballmer’s letter puts pressure on the board to act quickly or face the possibility that they will fail to get the best deal possible for Yahoo shareholders, Mr. Klausner said.
But waging a battle over board seats while offering a lower price for Yahoo could prove to be a gamble for Microsoft. In recent weeks, many large Yahoo shareholders have indicated that they would favor a deal with Microsoft, at a slightly higher price. It is not clear that Yahoo shareholders would be happy with a deal at the current price, let alone at a price that is even lower.
Still, some experts in mergers and acquisitions say that without an alternative, Yahoo shareholders are likely to vote in favor of a Microsoft offer, even if it is lower.
“Although shareholders may not be happy with a move like that, in general they will support a premium bid,” said Morton A. Pierce, who heads the mergers and acquisitions practice at Dewey & LeBoeuf, a law firm in New York.
Still, Mr. Pierce says that Microsoft may still raise its bid. “Generally in situations like these, people will bump their offer to avoid the monetary and social cost of going through a proxy contest,” he said.
In his letter, Mr. Ballmer noted that in the last two months, the stock market had declined and Yahoo’s business appears to have deteriorated. He also said that Yahoo had adopted a plan to retain employees in the event of a merger that would make Microsoft’s acquisition even more costly.
“By any fair measure, the large premium we offered in January is even more significant today,” Mr. Ballmer wrote. “We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.”
But Yahoo has disputed the notion that its business is deteriorating. In a presentation to investors in mid-March, executives reaffirmed their earlier financial projections for 2008 and put forward bullish growth forecasts for the next three years.
“This plan has received positive feedback from our stockholders, further strengthening the view that Yahoo is worth well more as a standalone company than the value offered in your proposal, and would be even more valuable to Microsoft,” Yahoo said in its statement.