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Following two weeks of unproductive negotiations, Redmond, California-based Microsoft has retained the  services of a proxy contest specialist and has started preparing for a battle over control of Web pioneer Yahoo using an aggressive maneuver to replace the Sunnyvale, California-based company's board of directors, the New York Times has said. Microsoft has declined to comment on the report, while Yahoo officially rejected Microsoft's initial $44.6 billion offer as one that "substantially undervalues" Yahoo, and said Tuesday that it is continuing to review all strategic offers. Unless Yahoo's existing board members quickly accept the offer Microsoft made on February 1, the world's largest software company will launch a proxy boardroom maneuver seeking to replace the ten existing Yahoo board members, including chief executive Jerry Yang, with a group willing to accept the deal, the New York Times' DealBook blog said Tuesday, citing people close to the matter. A proxy maneuver would involve Microsoft using its right as a shareholder of Yahoo stock to nominate its own set of executives to the Yahoo board, followed later by a vote to accept Microsoft's offer. Nominations for the Yahoo board positions must be submitted by March 13, and should Microsoft succeed in having a replacement board elected by Yahoo shareholders, a vote would have to wait until the firm's next shareholder meeting, which is generally held each June. Proxy Specialist Hired Microsoft has hired New York-based proxy solicitation specialist group Innisfree M&A Inc. to prepare an organized ouster of Yahoo's board of directors. Innisfree M&A was founded in 1997 and  specializes in shareholder meetings, proxy fights, tender offers and related matters. Some analysts see Microsoft chief executive Steve Ballmer as having an especially deep-rooted interest in seeing through a successful acquisition of Yahoo. "Ballmer has staked his reputation on this bid. By going hostile, Microsoft is attempting to shed its image as a stodgy old tech firm. They have a lot invested in getting this done," Wayne State University assistant professor of law and the author of the Deal Professor blog, Steven M. Davidoff, recently told the Washington Post. Less Expensive Than Raising Bid A proxy contest would likely cost Microsoft less - in the $20 million to $30 million range - than increasing the $44.6 billion bid it made to Yahoo, however such a maneuver, while certain to put pressure on Yahoo's board of directors, would likely spark increased animosity towards the world's largest software maker among Yahoo  employees. The costs involved to pursue a proxy contest include production of persuasive mailings to Yahoo shareholders and the fees charged by Innisfree M&A Inc. to manage preparations for and the subsequent execution of a proxy battle. While several of Yahoo's largest shareholders such as Legg Mason's Bill Miller have said Microsoft needs to raise its bid to forge a deal, the nominal value of Microsoft's initial bid has dropped to just over $41 billion, due to the company's stock falling a corresponding 13.6 percent during the ensuing weeks, and increasing its bid price from $31 per share would now cost Microsoft $1.4 billion more for each dollar added to that figure. Microsoft chairman Bill Gates has spoken recently about moving his company forward with or without Yahoo, and Monday said the $44.6 billion bid was fair. "We sent them a letter and said we think that’s a fair offer. There’s nothing that’s gone on other than us stating that we think it’s a fair offer. They should take a hard look at it," Gates told the Associated Press. "We've sent our letter and we've reinforced that we consider that it's a very fair offer," Gates told Reuters Monday. Some analysts see Microsoft's hard stance and possible proxy contest as strong maneuvers. "Microsoft is doing the smart thing. It's giving both the carrot and the stick," Morningstar analyst Toan Tran told Reuters recently. "The carrot was the big premium on Yahoo stock and now the stick is the threat of a proxy fight," Tran added. Yahoo Announces Preemptive Severance Packages Seeking to assure its workers and stave off mass departures in light of a possible Microsoft takeover, Yahoo said Tuesday that its board of directors will provide all full-time employees new, more robust severance benefits in the event they are terminated without cause for a two year period after any merger is finalized. The new severance benefits include health and dental insurance coverage and a continuation of a worker's  base salary for between four months and two years, depending on a worker's position and tenure, and faster stock option vesting, Yahoo said in a Securities and Exchange Commission filing. Microsoft has said that it values and hopes to retain Yahoo's employees, especially key engineers and leaders at the firm, and would "offer significant retention packages to your engineers, key leaders and employees across all disciplines," according to its initial letter to Yahoo's directors. Microsoft has also said that it could save as much as $1 billion from revenue benefits and other areas of cost-cutting associated with a Yahoo merger, savings some analysts see as likely to come from layoffs after the firm trims overlapping business departments. The added benefits, which include reimbursement for outplacement services with a cap of $15,000, were approved "to help retain the employees, help maintain a stable work environment and provide certain economic benefits to the employees," Yahoo said in the filing, which came only a week after the firm began laying off some 1,000 of its workforce of about 14,000 employees. Yahoo said that it would take pre-tax cash charges between $20 million and $25 million to account for the added benefits, which could increase Microsoft's takeover costs should a deal take place. Poison Pill Provision Could Be Nullified Yahoo board members could seek to use a so-called "poison pill" shareholder rights provision the firm has in place, which would allow it to issue additional stock in hopes of diluting the value of each Yahoo share and increasing the takeover cost for Microsoft. Under the poison pill plan, should Microsoft come into possession of more than a 15 percent stake in Yahoo without the approval of the board, Yahoo could increase its existing 1.4 billion outstanding shares by fifteen fold, forcing Microsoft to buy 19.7 billion shares at a cost that could exceed $300 billion. Microsoft could prevent the provision from being put in place by succeeding in its proxy contest and having the new Microsoft-friendly board vote to nullify or dismantle the provision. Microsoft could also seek to make a deal directly with Yahoo shareholders, effectively circumventing the Web pioneer's management and trying to buy stock directly. Microsoft Prepares For Yahoo Takeover By Proxy Over the past two weeks Wall Street has shown that Yahoo's shareholders largely remain confident that Microsoft will increase its bid, with some investors saying they won't lend support to a proxy contest unless that happens, while other investors see a proxy contest as the best bet to arrive at a higher sale price for Yahoo. Since 2001, less than five percent of all proxy contests have been waged during hostile acquisition attempts, according to research from FactSet Research System Inc. Most companies - some 63 percent - seeking to pursue a takeover, have increased their initial offer, according to FactSet. At least one Yahoo board member has recently met with Peter Chernin, president of Rupert Murdock's giant media conglomerate News Corp., with other company officials traveling to Yahoo's offices for talks, according to a recent Wall Street Journal report citing people familiar with the matter. Top Internet search and online advertising company Google continues its commanding lead over both Microsoft and Yahoo, likely content to see the hostile takeover attempt drag on. "They don't want to see a scenario arise where Google is benefiting from distractions and delays," Standard & Poor's senior equity analyst Scott Kessler told the Washington Post in a recent article. "The longer this goes on, the more you're going to see attrition in Yahoo's employee ranks, making Yahoo less appealing," Kessler added. Related Links:
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11:20 pm on Feb. 20, 2008 (utc 0)