Microsoft Reconsiders Yahoo Bid

A source familiar with Microsoft's bid for Yahoo, said Friday that the software giant is evaluating its offer due to concerns of a sinking economy and deterioration in Yahoo’s business.

Microsoft had announced its bid for Yahoo! on February 1 offering $44.6 billion for acquiring the Web giant. The possible merger promises to create a more formidable challenge to online juggernaut Google Inc.

Yahoo’s board had unanimously rejected the bid, saying that it substantially undervalued the company. But, Microsoft hasn’t lost hope and it continues to press for the acquisition.

According to the source however, Microsoft is growing more and more impatient with the Yahoo! board's refusal to engage in formal negotiations even amid extensive insight that Yahoo’s business has been weakening.

In February, Yahoo! and Microsoft both lost less than 1% of their share of U.S. Web searches. During that period, Yahoo! grabbed 21.6% of all searches, more than Microsoft's 9.6%. Google Inc. was still on the top with its share rising less than 1 point to 59.2%.

Yahoo! is also said to have lost its value due to the continual fall in the stock markets in tandem with the U.S. economy. All these factors may prompt Microsoft to re-evaluate its bid.

Before Microsoft's February bid, the value of Yahoo! stock was continually falling and was fast approaching a four-year low. The Microsoft offer, which originally put a 62% premium on Yahoo's stock value, had rejuvenated the stock.

If Microsoft now reduces its bid, or walks away from the deal, Yahoo's shares could plummet, no doubt prompting a shareholder revolt. The offer value has already been reduced to about $42 billion because the deal's value is partly dependent on the value of Microsoft's shares.

Whether Microsoft actually intends to carry out its threat or is merely using it as a negotiating tactic is unclear. Whatever the case, it would definitely turn up the heat on Yahoo's board.

Executives from Microsoft and Yahoo! have met at least two times since the bid was first announced. There have also been reports that the company executives met this week too. However, neither discussion was serious.

After Microsoft’s bid, Yahoo embarked on a campaign to convince investors that it is poised for bigger growth in the future. The company claims that its revenue is set to rise more than 70% during the next three years.

Yahoo! has also postponed its annual shareholder meeting, to prevent Microsoft nominating its own slate of directors to fill Yahoo's board. A new date for the meeting has not been set.

Yahoo! shares fell $1.09, or 3.8%, to $27.27 in after-hours trading Friday on concern that Microsoft might reduce its buyout bid. Microsoft shares rose 49 cents, or 1.7%, to $29.65 on the prospect of the company saving money on the deal.