Given the structure of Yahoo's board of directors, Microsoft will likely trigger a proxy fight for the seats of Yahoo's board without first making a tender offer, proxy solicitation experts said.
Proxy experts weighed in after Microsoft Chairman Bill Gates reaffirmed Feb. 19 that his company's offer was fair in the wake of Yahoo's Feb. 11 rebuke of the $44.6 billion offer, which was $31 per share, a 62 percent premium on Yahoo's trading price as of Jan. 31.
Microsoft could first conduct a hostile tender, advertising its offer in a major publication, such as the Wall Street Journal or the New York Times, and mailing the tender offer documents directly to Yahoo's shareholders.
Yahoo would then have to formally accept or reject the tender offer in accordance with Securities and Exchange Commission rules.
However, proxy experts doubt the software company will risk getting formally rejected when a proxy fight might be a more reasonable next step.
Yahoo's 10-member board is up for re-election at the annual shareholders' meeting, making it a bit easier for Microsoft to assume control if it can sway enough shareholders. That's not often available, said one proxy expert, who declined to be identified because he has several clients in Silicon Valley.
"Often times it's a staggered board and they would only get a number of seats," he said. "In the case of a staggered board, you might want to proceed with a tender offer to lock down a certain percentage of ownership, but why put the money out there when [Microsoft] can control the board?"
The next shareholders' meeting will likely be in June, but a Yahoo spokesperson told eWEEK no date has been set. Microsoft has until March 14 to submit its nominations for Yahoo's board.
In a proxy fight, Microsoft would try to persuade Yahoo shareholders to oust the majority of Yahoo's current 10 board members when they all become eligible for re-election.
Microsoft would need at least five of their directors elected to that board to control it. This could be a challenge because of internal resistance; Yahoo co-founder, CEO and board member Jerry Yang is said to strongly oppose a takeover by Microsoft.
However, some reports said Yahoo Chairman Roy Bostock is concerned about Yang's emotional attachment to the company he helped create. The proxy expert said this could cause a split in the board that could work in Microsoft's favor.
Moreover, if Microsoft managed to acquire 30 to 40 percent of Yahoo's stock from investors spooked by Microsoft's overture, it would be an "enormous challenge for Yahoo to beat them at the meeting," said another proxy expert, who requested anonymity.
If Yahoo is to have a chance of defeating Microsoft in a proxy battle for control of the Yahoo board, Yahoo will need to marshal shareholder support from two main constituencies, Ken Altman, president of proxy solicitation firm The Altman Group, told eWEEK.
Altman said the first is institutional owners who believe the price offered by Microsoft does not reflect full value for Yahoo's shares. The second group comprises smaller shareholders holding Yahoo shares in their own name or through brokerage firms.
"If Yahoo's institutional owners were to split over whether they should support the Microsoft nominees to Yahoo's board, it may well be that a highly aggressive solicitation of the small shareowners turns out to be the decisive element in the proxy battle," Altman said.