Microsoft may face tough proxy fight without higher bid

Without increasing its bid above $31 a share, a Microsoft proxy fight is likely to be a tough sell among at least one-fourth of Yahoo's institutional investors, say portfolio managers.

That figure does not include the more than 12 percent stake that Yahoo officers and directors held, as of the company's last proxy filing in April last year. Add that number into the mix and nearly one-third of Yahoo's shares, at a minimum, would likely oppose a Microsoft effort to unseat Yahoo's current board of directors via a proxy war.

"I'm not dying to sell at $29, which is where the deal is priced at now, or even $31 (the deal value at the time of the initial offer). I'm pretty happy to own Yahoo. And I know that if Microsoft doesn't get it now, it'll come back a year from now because it needs Yahoo," said one portfolio manager, who also owns a sizable stake in Microsoft and who requested anonymity.

Winning the hearts of investors is key to any successful merger, friendly or not, and in a proxy fight, the game becomes even more crucial. (For full coverage, see "Microsoft's big bid for Yahoo.")

In general, if one-third of investors votes are against a deal, it can be very difficult to win approval of a merger. But it is not necessarily impossible, said one proxy solicitor, who requested anonymity. The proxy solicitor also noted that while investors may indicate that they may vote one way, it does not always translate into how they actually vote when the time comes.

Microsoft has threatened to launch a proxy fight and exchange offer, should Yahoo refuse to enter formal merger talks and conclude a deal by this weekend.

The software giant launched its unsolicited buyout bid for Yahoo on Feb. 1, valuing the cash-stock deal at $31 a share. Yahoo later rejected the offer as undervaluing the company and only last month ended its "radio silence" and began informal merger talks with Microsoft.

Microsoft has refused to consider raising its bid and "bidding against itself," unless Yahoo engages in formal merger talks. Meanwhile, Yahoo has refused to open its books until it gets some signal that Microsoft would be willing to raise its offer, according to sources.

And while many Wall Street and Microsoft-Yahoo observers are anticipating that Yahoo's first-quarter earnings report on Tuesday will be the catalyst to prompt either party to move the deal forward, others are not so sure.

The thinking goes that if Yahoo hits the high-end of its reconfirmed revenue range and gives a rosy outlook, Microsoft may be willing to increase its bid and do a friendly deal. And if Yahoo comes in at the low-end of the range, the Internet pioneer will need to suck it up and sit at the negotiating table without any beforehand wink or nod from Microsoft that it will raise the bid.

But proxy solicitors and some investors do not believe that the first-quarter results, should they remain in Yahoo's estimated range, will have a bearing on how Microsoft and Yahoo will react--even if they are on the high or low side of the range.

"Microsoft is not buying Yahoo for one quarter's performance or two. They're buying it for the strategic advantage they hope to get over the long-term," said the portfolio manager.