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Sun 6 Apr 2008 01:20 PM

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Microsoft's Yahoo! bid looks risky

Microsoft look set for a hostile takeover of Yahoo! but does the deal represent real value for Redmond?

Microsoft fired its final warning shot at Yahoo! yesterday, giving the company three weeks to accept its takeover offer or face a proxy battle for control of the company.

According to a letter sent to Yahoo's board of directors by Steve Ballmer, and subsequently published on Microsoft's website, Microsoft hasn't been able to make any headway with Yahoo! towards a "speedy and ultimately friendly transaction" so it's now preparing to go to shareholders directly - and most likely with a lesser offer than the one on the table.

While Microsoft is obviously trying to scare Yahoo! into taking the $31 per share that's currently on offer, it's also obvious that Yahoo! is just about out of options. The company has done everything it could to rustle up a counter deal, but with no luck. If Microsoft's claims are to be believed, Yahoo! has even made changes to its company plan to make any takeover more costly than it would have been previously.

The problem for Yahoo! is that in the two months since the initial offer was made, global equity markets have declined, Yahoo's share of the online market has declined and the worsening financial climate is making everyone that bit more nervous. Yahoo! shareholders aren't about to get another offer any time soon, so they either reject Microsoft and hope that Yahoo! somehow manages to reserve its gradual decline, or else take Redmond's offer, most likely losing Yahoo's management in the process.

The worsening financial situation does raise questions as to whether it's really worth Microsoft going all the way to a hostile takeover. Ballmer doesn't seem the type to back down, but those few weeks since the deal was put forward have not only made Yahoo! look less attractive, but also make a big, bad takeover battle look financially dubious. Microsoft has said that it would borrow to finance the deal, and certain analysts have said that Microsoft's offer marks the top end of what they think Yahoo! is worth, so engaging in a costly proxy battle looks like spending more to get less.

Ballmer has admitted that the deal is about getting brand and market share in online advertising, rather than any specific technology or expertise held by Yahoo!, so they can probably afford to lose a fair number of disgruntled Yahoo! employees, but the fall out from a hostile takeover would still make integrating Yahoo! a very difficult task. In a period of economic uncertainty, Microsoft's ongoing bid for an ailing Yahoo! is starting to look like a big gamble.

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