Microsoft threatens Yahoo with hostile bid

Microsoft Corp. said Saturday it would turn its $40 billion bid for Yahoo Inc. hostile and probably lower its offer if the companies don’t reach a deal within three weeks.

Microsoft vowed to nominate a slate of Yahoo directors who support a takeover if the deadline isn’t met. The world’s biggest software company also went out of its way to quash Wall Street speculation that it would raise its 2-month-old offer to seal a deal.

“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,” Microsoft Chief Executive Steve Ballmer wrote in a letter sent to Yahoo’s board Saturday.

Yahoo had no immediate response. A person close to the company said its board was reviewing the letter.

Although managers from the two companies have met twice since Microsoft announced its offer in early February, Ballmer complained in his letter that the Yahoo side hadn’t been authorized to negotiate. Instead, Yahoo has been trying to work out an alternative alliance with the likes of News Corp., AOL parent Time Warner Inc. and Google Inc.

Microsoft could launch a tender offer to buy shares directly from investors, but Yahoo has a “poison pill” takeover defense that empowers the board to make such a campaign prohibitively expensive.

For that reason, executives involved in the fight have pointed to a proxy battle to elect directors as the most likely escalation if Yahoo doesn’t accept Microsoft’s cash and stock bid or secure a comparable offer from another party.

Redmond., Wash.-based Microsoft has pursued Yahoo for more than a year, arguing that combining their consumer services and Internet advertising efforts would provide the best challenge to Google, which dominates search-based advertising and is moving rapidly into new areas.

Yahoo has been ceding market share to Google, though it continues to lead in displaying graphic advertising.

Sunnyvale, Calif.-based Yahoo collaborates with Microsoft on some fronts, but it has sought to remain an independent company. Executives there say Microsoft’s corporate culture and dependence on sales of Windows and Office software, which are growing more slowly than Internet-based services, make it a poor fit.

Since Feb. 1, when Microsoft went public with its offer, then worth $44.6 billion, most analysts have believed the 62 percent premium to Yahoo’s stock price at the time made an eventual union inevitable. Microsoft’s subsequent stock decline has cut the offer’s value by about $5 billion.

But Ballmer argued in his letter that Yahoo’s fortunes have fallen even further in the past two months. He noted that the broader economy has weakened, the stock market has slid and Yahoo’s share of the search market and Web traffic has shrunk.

“By any fair measure, the large premium we offered in January is even more significant today,” Ballmer wrote. “We believe that the majority of your shareholders share this assessment, even after reviewing your public disclosures relating to your future prospects.”