Yahoo to Microsoft: No, No, No
Details of the backroom dealings between Microsoft and Yahoo from an investor lawsuit were unsealed by Delaware Chancery Court Judge William Chandler on Monday.
The document adds some color to what we already know, including a history of rebuffing offers dating back to 2007, criticism over the size of Yahoo’s severance plan by its own consultants and Yahoo’s recently hired CTO.
Notes by a Yahoo participant from a phone call between CEO Jerry Yang and Microsoft CEO Steve Ballmer Ballmer also appear to indicate that Yang quickly rejected Microsoft’s January 2008 overtures, as his predecessor Terry Semel did a year before (at the far higher price of $40).
The following are excerpts from the complaint containing internal Yahoo correspondence. The numbers at the start of each excerpt refer to the paragraph order in the complaint:
Terry Semel rejects a $40 per share offer from Microsoft in Jan. 2007
31. Yahoo’s reaction has been consistent, giving the back of the hand to Microsoft’s efforts towards a consensual deal, including a January 2007 acquisition proposal offering about $40 per share. The Board-authorized response to that approach was a letter from then-CEO Terry Semel rejecting “a broader strategic transaction at [that] time,” but professing a willingness to discuss “a commercial partnership arrangement.” Discovery obtained by Plaintiffs gives no indication of serious discussions about any such commercial relationship.
Yang ordered a rejection letter to be prepared in Oct, 2007 spurning an expected offer from a “third party” that the complaint says is Microsoft:
32. During an October 5, 2007, meeting, Yang and the Board discussed “recent communications about a third party’s interest in a transaction with the Company” and “the likelihood that a third party would make an offer to purchase the Company.” Yang obtained approval to set the stage publicly for a rejection of any offer. A standby press release to be issued by Yang after consultation with select Board members stated, among other things, that “the Board will carefully consider the offer and is committed to acting in the best interests of shareholders in doing so,” but that it had “very recently determined that it was not the right time for the company to seek to sell itself.”
Notes from phone call between Microsoft’s Steve Ballmer and Yahoo’s Jerry Yang a day ahead of Microsoft going public with its offer
38. On January 31, 2008, telephone call captured by notes of an unidentified Yahoo participant, Ballmer told Yang that Microsoft much preferred to negotiate a deal in private but was prepared to disclose its offer publicly because of concerns that Yang would never support any deal, regardless of price. According to the notes:
–if we want to make a counterproposal and in the ballpark then we don’t go public and we push for an [agreement].
–if you guys can’t get to a [point] of discussion in a couple of days — then still going to go public — and everyone can see what investors think
–if on the same page tonight then hold announcement but if not then we put it out there and its visible and we work through it
—if had a price and willing to sell the business and get that comfort from you and Roy then can hold it a couple of days
Jerry — you don’t lose anything by waiting a week.
Steve — if you really don’t want to sell the biz then don’t want to wait.
Microsoft had earmarked $1.5 billion to retain Yahoo employees.
39. According to the notes, Microsoft made clear from the outset it “care[s] about employees,” “want[s] employees to be OK,” and had earmarked “$1.5b for retention of employees,” in addition to the “$45b for deal.”
Yahoo CTO Ari Balogh disagreed with Yang’s quick adoption of an employee retention plan.
50. The day after Microsoft’s offer, Yahoo’s newly-hired Chief Technology Officer, Ari Balogh, the person to whom Yahoo’s engineers report, told Yang that he disagreed with Yang’s desire for immediate adoption of a broad employee retention plan. Balogh reasoned that Microsoft’s offer:
“is likely hugely retentive for anyone who understands how these things go (and everyone will shortly as we prepare them for the dance). We should run the glue analysis on the key folks, and have set up a pool and leeway to move quickly based on senior management judgment, as necessary. After this settles in, we can make a decision on something narrow or broad or nothing.”
A compensation consultant firm Yahoo hired to evaluate its change in control severance plan called Yahoo’s plans “nuts.”
61. Compensia calculated that the cost of the proposal would equal $1.5 billion, or 3.2% of the transaction price. In an internal email, Compensia President Tim Sparks wrote that “3.2% seems very high for a deal of this size, but I am guessing (hoping) that this assumes 100% double trigger activation?” (Ex. A) In an email one minute later, Sparks made clear his view of Yang’s plan to provide 100% equity acceleration for all employees: “That’s nuts.” (Ex. B)