Microsoft CEO Steve Ballmer lowered the boom on Yahoo April 5, telling the company that if the two companies can't come to a decision regarding Microsoft's $31 per share purchase offer within three weeks, it will take its offer directly to Yahoo's shareholders.
Ballmer offered the ultimatum, which signals the beginning of a proxy fight, in a letter sent to Yahoo's board Saturday, an unusual move for a dialogue that has been conducted throughout the course of the business week.
The letter comes after Microsoft and Yahoo have held casual but fruitless negotiations regarding Microsoft's offer, which was worth $44.6 billion when it was first made Feb. 1, but has sunk to about $42 billion due to decline in both company's shares.
Yahoo has met or spoken with other companies, such as Google, Time Warner and News Corp.'s MySpace for alternative deals but so far has not been able to find a suitable fit, which Ballmer took exception to in his letter.
"We understand that you have been meeting to consider and assess your alternatives, including alternative transactions with others in the industry, but we've seen no indication that you have authorized Yahoo management to negotiate with Microsoft," Ballmer wrote.
Ballmer then noted that not only have the public equity markets and overall economic conditions weakened, but said Yahoo's search and page view shares have declined, making Microsoft's 62 percent premium even more valuable for shareholders.
That set up the coup de grace:
"If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo board," Ballmer wrote.
"The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal."
No White Knights for Yahoo, No Winners in a Fight
Financial analysts and proxy experts have said such a battle could ding Yahoo's brand because it will alienate shareholders who feel Yahoo is depriving them a good deal.
A hostile takeover will also not reflect well on Microsoft, which by unseating Yahoo's members and installing its own officials is bound to aggravate some shareholders who prize Yahoo's independence.
No white knights have emerged to save Yahoo so a deal seems like a foregone conclusion.
Many experts believe Microsoft needs to buy Yahoo to close the gap between itself and Google, which leads the paid search and online advertising market by leaps and bounds and just acquired DoubleClick to boost its ad-serving capabilities and bolster its traditionally weak position in display ads.
Armed with Yahoo, Microsoft would lead the market in display ads but would still rank a distant second to Google in paid text links, currently the primary online ad moneymaker.
Microsoft would also be able to leverage Yahoo's strong mobile advertising assets, which along with video and social networking targets is an area all Internet companies are looking to exploit in the next few years.