Yahoo Corporate Governance in Microsoft Takeover free essay sample

It is also the second largest internet search engine on the planet, behind Google, which is also their main competitor. Jerry Yang, 39, is Co-Founder, CEO, Chief Yahoo! and Executive Director and Susan L. Decker, 45, is President. Yahoo! , a Delaware corporation, was founded in 1994, went public in April 1996 and is headquartered in Sunnyvale, California. The Yahoo! board’s recent actions will be evaluated based on whether by blocking a hostile takeover bid from Microsoft, it considered what was in the best interest of the corporation and its shareholders. The business judgment rule usually prevails in a situation like this one where there is a â€Å"presumption that in making a business decision the directors of the corporation acted in an informed basis, in good faith and in the honest belief that the action was in the best interests of the company. † . We know that the Yahoo! board was permitted to use defensive measures like the poison pill employed based on the legal precedence set in the Revlon case. The board of directors needs to act as a disinterested party and not breach other aspects of its fiduciary duty. There should be a reasonable benefit accruing for the company’s stakeholders even as the board of directors considers the interests of other constituencies as originally stated in the Unocal case and reaffirmed in the Revlon case. If however Yahoo! was clearly for sale to Google or another party after the Microsoft bid then the Yahoo! board has to become an auctioneer attempting to get the highest price for the shareholder’s benefit. We know that historically a poison pill defense to a hostile takeover will drive up the share price offered thereby increasing shareholder value. And we know in a business world where stock options and salary are used for board of directors compensation that the board members may be tempted to try to drive the takeover bid price above the strike price of their options rather than accept a lower premium price for all other shareholders. The board of directors then has a duty of loyalty to the company’s shareholders. In Paramount vs. Time the court further defined the two circumstances under which so called Revlon duties should be undertaken by a board of directors. The first situation happens when a corporation initiates an active bidding process to sell itself or breakup the company into separate pieces e. g. selling the Yahoo! search engine to Microsoft. The second situation in which Revlon duties may be triggered occurs when a target abandons its long term strategy and seeks another transaction that also breaks up the company. In the Yahoo! case we want to determine whether Yahoo! had a long term strategy rather than simply a reorganization plan headed by the Yahoo! President, Susan Decker. We learn from Paramount vs. Time that the court will look at the defensive actions like the poison pill in relation to the importance of the corporate objective threatened, alternative methods contemplated by the board and the impact of the defensive action on all the interested constituencies. The court does not want to make an economic decision as to whether a particular board decision was a wise one in terms of short term vs. long term investment and instead the court will support a boards actions under the business judgment rule. The business judgment rule does not apply if disgruntled shareholders can convince the court that the board of directors violated its fiduciary duties; shareholders usually claim a failure in the duty of care or the duty of loyalty. We will show in this paper that the board left itself wide open to such a derivative suit with their actions. For the past few years, Microsoft Corporation, the software behemoth located in Redmond Washington, has been looking to acquire Yahoo! , Inc. While Microsoft Corp. has numerous reasons to be interested in acquiring Yahoo! there are few options available for Yahoo! Inc. Like Google’s purchase of Double-Click in 2007, Microsoft sees Yahoo! as a way to extract internet advertising revenue. Further, Microsoft has for years sought to build a winning portal that could dominate the search engine market, currently dominated by Google. MSN was Microsoft’s version of AOL. Even after years of Research Development in this area, Microsoft still o nly has 19% of the internet search engine market (and that’s because of ISP bundling and desktop default presets. Actual search engine use of MSN is much lower than 19%. Google is a money-maker and has a dominating market share. Beyond the search engine market, there also is that â€Å"innovation† nirvana for which Microsoft is always searching. It wasn’t Hotmail, it wasn’t MSN maps, it wasn’t SoapBox, and the list of Microsoft Corp. disappointments goes on. Now they decided to go for a big acquisition. Microsoft’s original unsolicited offer of $44. 6 billion for a complete buyout of Yahoo! Was rejected by Yahoo! ’s board. Microsoft has continued to revise their bids, increasing it to $47. B to no avail. This initial bid was $31 per share a 62% premium for Yahoo’s shareholders. The usual list of synergistic savings was also used to justify such a large purchase. Microsoft and Carl Icahn’s, who owns 5% of Yahoo! , latest combined offer in July 2008 was a partial buyout of Yahoo! ’s search business for $9 billion cash and $3 billion a year in annual revenue. Even these terms were unacceptable to the Yahoo! board, of particular note; Carl Icahn would have been left in charge of the unconsumed portion of the company. On the flip side of the coin, Yahoo! s Jerry Yang, co-founder and CEO, sees a takeover by Microsoft Corp. as the beginning of the end for Yahoo! Fearful that Yahoo! will become another cog in the Microsoft wheel, Yang and the Yahoo! team has searched desperately for any alternative that would keep Yahoo! independent. The Yahoo! shareholders may be upset that Jerry Yang did not take Microsoft’s offer of $33 a share considering that Yahoo! ’ share price is now below $20. However, Carl Icahn did not have an alternative strategy for increasing shareholder value and he is known for breaking up companies into smaller parts. Icahn lost any remaining bargaining power when he began to flirt with Microsoft. With a perfunctory nod to fiduciary duty, Yang’s most recent move was to partner with Google, in a non-exclusive search ad deal for an eventual $800 million in ad revenue annually. However, the combination of the top two (2) players in the search ad business will give Google an effective 90% share. A move Microsoft protests and Congress is investigating. Yahoo! ’s estimates for the first year cash flow is between $250 and $450 million. Yahoo! nitially had a poison pill in place to defend itself from a hostile takeover attempt. As a defensive measure poison pills are considered to be like mutual assured destruction (MAD) strategy used by the nuclear powers during the Cold War. In fact a poison pill has never been triggered in a hostile takeover. Instead the threat tends to increase the final bidding price thereby benefiting current shareholders. Beyond partnering with Google, Yang has taken additional steps to bolster the flagging company, like giving President Susan Decker broad power in restructuring Yahoo! s divisions and settling with Carl Icahn and disenfranchised investors. Unfortunately for the shareholders, Yang and fellow board members have fought hard, too hard, to keep Yahoo! independently viable. Yahoo! Inc. ’s board of Directors is comprised of 9 individuals, including a separate Chairman and CEO (see Appendix A). For our analysis of the Yahoo! board’s actions, we should first note that Marty Lipton, a corporate lawyer credited with developing the poison pill takeover defense in 1982, decried the shareholder-centric board in a June 25 address at the University of Minnesota. He thinks that boards will have difficulty recruiting quality directors; there will be greater isolation of the CEO’s, and burdensome regulatory duties. Lipton believes that the vote of confidence by shareholders and the market will be the only way to â€Å"cope with the demands for short-term(and shortsighted) stock gains by activist hedge funds and make the long-term investments in the future of their businesses that are essential for future prosperity of our nation. While the board has interconnections between several members and the management team, it also has a set of members with a broad set of skills and experience. On the â€Å"independent board spectrum†, Yahoo! rates low, to the point of ignoring their fiduciary duty to shareholders and putting shareholders interests behind their interest in the Yahoo! entity. Jerry Yang, along with Eric Hippeau, and former board member, Robert Kotick, have expressed their desire to keep Yahoo! ’s independence, regard less of the offer on the table. Like most company founders, Yang believes Microsoft has significantly undervalued his Yahoo! After much wrangling, Yahoo! Inc. has now been forced to seat billionaire Carl Icahn on the board in a settlement reached on July 21, 2008. Carl Icahn takes Robert Kotick’s place who resigned voluntarily. Icahn will appoint an additional two board members, expanding the board to eleven members. Yahoo! apparently plans to add former Viacom CEO Frank Biondi and John Chapple the former CEO of Nextel partners to fill the two board seats controlled by Carl Icahn. Icahn and Biondi were part of the proxy battle to take control of the Time Warner board a few years ago. Yahoo! is experiencing an ever increasing loss of top engineers and managers. The worsening U. S. economy will likely hurt display advertising which is the central element in Yahoo! ’s business. Yahoo! ’s most recent quarterly profits have fallen again. Microsoft and Google both see hard times ahead for online advertising. Google initially surpassed Yahoo! in technology then left it in the dust as a competitor. Yang responded to the Microsoft bid by outsourcing Yahoo! s search/online advertising business to Google. The Yahoo! management team and board are working hard to justify turning down the $47. 5 billion offer to shareholders. Jerry Yang states that the compromise with Carl Icahn will put the distraction behind Yahoo so that he can pursue the strategy to reinvigorate Yahoo! ’s falling stock prices. There has been very little done with the exception of Su san Decker’s reorganization plan. At a recent shareholder meeting, Yahoo! Chairman Roy Bostock received support from only 60% of Yahoo! hareholders votes cast and CEO Jerry Yang received only 66% of votes cast. To confuse matters further, at the July 2008 Annual Meeting, shareholders gave Yang and the other board members a strong vote of confidence, even in light of the talks with Microsoft breaking down. Yahoo! ’s stock price has continued to decline since the offer was withdrawn. Apparently unhappy with the results, Capital Research Global Investors, a 6. 2% shareholder, asked for a review of how its votes were cast in the election showing additional shareholder dissatisfaction. Now that we have a framework of the events that have transpired, we can evaluate the whether the Board of Director’s upheld their fiduciary duty to Yahoo! Inc. shareholders when they rejected Microsoft Corporation’s initial buyout offer. Microsoft Corporation’s full buyout offer was for $47. 5 billion. While the consensus among most analysts is that the Yahoo! ’s board did not meet their fiduciary duty to the shareholder, we wanted to be certain. Appendix B is a table and chart of Yahoo! and Microsoft stock prices before and after the Microsoft offer. As you can see, at Friday’s (08/08/2008) price of $19. 0, Yahoo! ’s stock price is well below the $28. 70 a share in May 2007, when talk of a buyout first leaked to the press. Yahoo! Inc. ’s book value was $12. 3 billion (Appendix C) and the market capitalization was $38 billion in 2008 just prior to when Microsoft offered to buy them out at a 62% premium. Since that time, Yahoo! has not created value for their shareholders; instead Yahoo! has seen its total market capitalization decrease to $28. 35 billion as of 8/8/2008. It is hard to imagine how the Yahoo! board could put their care of duty to shareholders first and still turn down Microsoft’s offer. In their press release, Yahoo! stated to following: After careful evaluation, the Board believes that Microsoft’s proposal substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments. The Board of Directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders. This statement is pretty weak and does not meet the Revlon standard. They are not saying that the Yahoo! is not for sale, but simply that the Microsoft offer was too low. This implies that they are for sale and the Revlon standard requires to board to act as auctioneers for the company to get the highest price for the shareholders once it has been established that the com pany is for sale. This statement may not have been enough on its own, but when they then went to AOL and others to solicit offers, it cemented that fact that the company was for sale. The board added insult to injure when Yahoo! ecently updated the amount it has paid to fight off the Microsoft takeover attempt to $36 million, which is more than one-third of its third quarter earnings of $131. 3 million. Speculation is that Yahoo! succeeded in what was the goal of CEO Jerry Yang and Chairman Roy Bostick from the beginning of Microsoft’s bid, to keep Yahoo! out of Microsoft. In summary, we believe that the Yahoo! board has left itself open to a derivative lawsuit from its shareholders. The basis for this lawsuit is the premise that the Yahoo! board violated its fiduciary duties to Yahoo! hareholders by rejecting the Microsoft bid. We feel that there may be enough evidence in this case to prove that the Yahoo! board of directors violated the duty of loyalty and duty of care, and they are not protected here by the business judgment rule according to the Revlon standard. There appears to be a â€Å"bad faith† action upon the part of the board of directors since they were responding to the whims of the CEO, who didn’t want to work with Microsoft, instead of finding the highest price for the shares. The CEO, Chairman and board of directors did not act in the best interests of Yahoo! shareholders.