Microsoft Deal May Be a Duty for Yahoo Board

SAN FRANCISCO (Reuters) – Yahoo Inc’s board seems to be looking for any way possible to escape takeover by Microsoft Corp, but in the end directors’ duty may be simply to take what the software company offers.

The pioneering Web company may be known for its fun-loving culturewhere employees refer to each other as "yahoos", dress in loudpurple-and-yellow T-shirts and harbor a deep Silicon Valley-breddistrust of rival Microsoft’s corporate culture.

But Yahoo’s 10-member board is far from being some band ofMicrosoft-hating ideologues that would block a deal with the world’slargest software company at any price.

Most of the board directors at Sunnyvale, California-based Yahoo aredrawn from the mainstream of American corporate life, includingexecutives and entrepreneurs from fields such as advertising, airlines,supermarkets and radio.

And in a world of heightened focus on corporate boards, directorsare under clear pressure to seek the best deal for shareholders,suggesting their fiduciary responsibility will prevail over anybet-the-farm strategy to remain independent.

"You can’t say ‘No’ to Microsoft’s offer based on some intangiblevision," said Clayton Moran, an analyst with Stanford Group in Houston.

Microsoft’s original cash-and-stock offer of $44.6 billion, or $31per share, was a more than 60 percent premium to Yahoo’s stock price.The offer value has since shrunk to about $42 billion — still asubstantial premium.

Wall Street has grown convinced that Microsoft’s price is aninsurmountable hurdle to would-be rivals and that the search foralternatives by Yahoo’s board is basically designed to exact a higheroffer from the Redmond, Washington-based giant.

"Doing some alternative deal is almost sure to be of less value toshareholders," Moran said. "You would see all sorts of lawsuits — andthey would be lawsuits with merit."

A spokeswoman declined to comment on the board’s activities beyond astatement on Monday rejecting Microsoft’s bid as too low: "Yahoo’sboard is carefully and thoroughly evaluating all of the company’sstrategic alternatives and will pursue the best course of action tomaximize long-term value," it said.

Despite discussions, according to sources, of tie-ups with other companies from Google Inc (GOOG.O: Quote, Profile, Research) to News Corp (NWSa.N: Quote, Profile, Research), Yahoo’s directors are not tech radicals who will attempt to go it alone at any cost.

"One way Yahoo has grown up is that they have created a pretty goodcorporate board," said a local recruiter who has performed a variety ofexecutive search assignments for Yahoo and is familiar with thedynamics of the directors.

"The average age is 55, which is typical for many corporate boards,but old for Silicon Valley," the recruiter said. "There is not a lot ofnext-generation thinking there."

LOTS OF CONNECTIONS

Even directors drawn from the tech world like venture capitalistEric Hippeau, one of the first institutional investors in Yahoo, andRobert Kotick, head of video game company Activision Inc (ATVI.O: Quote, Profile, Research), have ties that suggest they won’t oppose a Microsoft deal.

A key driver of Activision’s business is selling gaming titles forMicrosoft’s Xbox gaming console, accounting for one-third of its latestquarter’s software publishing sales.

In a curious twist, Hippeau was on the board of Danger Inc, makersof an innovative hybrid Web and phone device, that agreed to sell thecompany to Microsoft in a smaller-scale deal for undisclosed termsannounced this week. Hippeau was aboard a plane and could not bereached for comment.

Another Yahoo board member, Citizens Communications Co Chairman andChief Executive Maggie Wilderotter, was a former senior vice presidentat Microsoft’s public sector business, selling the company’s softwareto government agencies.

"It is quite a capable and experienced board. Its composition andcollective experience suggests the directors have an active interest indoing what’s best for shareholders," Sanford C. Bernstein analystJeffrey Lindsay said.

"There should be no real surprises," Lindsay said. "They are justexercising their responsibility as board members." He predicts the saleof the company at a modestly higher price.

Both sides are working from well-rehearsed scripts performed indozens of unsolicited takeovers in the past. Goldman, Sachs & Co,Lehman Brothers and Moelis & Co are working as financial advisersto Yahoo; Skadden, Arps, Slate, Meagher & Flom is Yahoo’s legaladviser. Munger Tolles & Olson is acting as counsel to Yahoo’soutside directors.

Jeffries & Co analyst Youssef Squali expects a drawn-out processin which Microsoft ultimately prevails by sweetening its bid by another$2 to $3 per share. But he warns against board brinkmanship in pursuinga goal as high as $40 a share.

"The risk of derailing a deal at the end of the day can provedangerous … considering that a ‘no deal’ scenario would send thestock back below $20 quickly," Squali wrote in a research note toclients, published on Thursday.

The board has days or weeks to decide. A month from now, nominationsfor board members are due for Yahoo’s annual shareholder meeting.Microsoft could turn hostile and nominate its own candidates as a wayof winning support for its deal.

"If they unreasonably drag it out, Yahoo board members would be subject to criticism," Lindsay said.

Moran was more blunt: "Regardless of their personalities, theyreally have a pretty clear responsibility to the shareholder — andpotential (legal) liability if they don’t do what’s right."

(Editing by Braden Reddall)

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