Microsoft may lower Yahoo bid

Proxy fight is also possible, it warns

If Yahoo's directors refuse to negotiate with Microsoft about a buyout, Microsoft may take its case directly to the company's investors, it has warned. (Erin Lubin/Bloomberg News/File 2008)

WASHINGTON - Microsoft Corp., whose $44.6 billion takeover offer was spurned by Yahoo Inc., said the Internet company's directors risk facing a proxy battle - and a lower bid - if they fail to agree to terms in three weeks.

If the directors refuse to negotiate, Microsoft plans to nominate a board slate and take its case to investors, chief executive Steven Ballmer said. He suggested the deal's value might decline if Microsoft takes the bid directly to them.

Ballmer said the companies have had no meaningful talks in the two months since the bid, a 62 percent premium to the stock price at the time. His stance may force Yahoo's CEO, Jerry Yang, to start discussions to avoid a fight with the world's biggest software maker.

"I think they're surprised that Yahoo's board has strung this out this long," Pat Becker, of Becker Capital Management in Portland, Ore., said. "If they have to go to a proxy fight, they possibly will lower the bid to compensate themselves for the time." Becker manages Microsoft shares among its $2.4 billion in assets.

Combining with Yahoo would allow Microsoft to unite the second- and third-most-popular search engines in the United States, helping them to take on Google, which gets more than half the Internet queries in the country.

Yahoo rejected the $31-a-share cash-and-stock bid Feb. 11. Making Microsoft go to Yahoo investors "will have an undesirable impact on the value of your company from our perspective, which will be reflected in the terms of our proposal," Ballmer said in a statement, which included a letter to Yahoo shareholders.

A spokeswoman for Sunnyvale, Calif.-based Yahoo said she could not immediately comment.

Yahoo said in February that it would seek alternatives to the Microsoft bid. The company has held talks with Time Warner Inc. and News Corp. about partnerships, people with knowledge of those discussions said in February.

Last month, Yahoo pointed to its number two position in Web search, its operations in Asia, and the potential cost savings of the deal to show it's worth more than Microsoft's offer. Yahoo said then that sales will climb at least 19 percent in each of the next two years and that growth would be higher than analysts anticipated.

Sanford C. Bernstein analyst Jeffrey Lindsay in New York called Yahoo's growth predictions in the next two years "too bullish," given the US economy's slowdown.

"Public indicators suggest that Yahoo's search and page view shares have declined," Ballmer said. "By any fair measure, the large premium we offered in January is even more significant today. We believe that the majority of your shareholders share this assessment."

Yahoo hasn't posted the date of its shareholders meeting. All 10 of its directors are up for re-election. The last meeting was June 12; under Delaware law, the company must hold one every 13 months.

"It's only a question of time before Microsoft takes them over," Lindsay said April 4. "It's just unfortunate that Yahoo has dragged it out so long because they are probably going to miss a few dollars that they could have obtained if they had negotiated immediately."