May 3, 2008 7:38 PM PDT

Yahoo's two largest institutional investors $1 apart from Microsoft's offer

Posted by Dawn Kawamoto

With Microsoft's withdrawal of its increased Yahoo bid on Saturday, the Internet search pioneer's two largest institutional investors are fuming, according to a source familiar with their thinking.

The two investors were willing to accept an offer of $34 a share, the source noted. Microsoft was offering an increased bid of $33.

"Yahoo overplayed its hand," said the source. "If Yahoo's two largest investors are willing to take $34 and Microsoft is willing to give $33, it's a lot closer than Yahoo's $37 (a share)."

Capital World Investors, which recently doubled its holdings in Yahoo, bringing it to a 10.1 percent stake, and Capital Research Global Investors, which holds nearly a 6.4 percent stake, are Yahoo's two largest institutional investors.

The two institutional investors, which are part of The Capital Group Companies, own a combined 16.5 percent stake in Yahoo.

When the markets open on Monday, Yahoo's shares, which closed Friday at $28.67, up nearly 7 percent, are likely to feel the pressure.

It would not be surprising to see Yahoo's stock fall to $24 or $25 a share, said sources familiar with the negotiations and the institutional investors' thinking.

"I don't think the stock will go back to $19, but it may fall to $24 or $25 a share," said a source familiar with Yahoo's negotiations.

On the day before Microsoft publicly announced its unsolicited cash and stock buyout bid for Yahoo, the Internet search pioneer's stock closed at $19.18 a share.

While Yahoo's two largest institutional investors own a larger stake in Microsoft than Yahoo, the Internet search pioneer's third-largest stake holder, Legg Mason, is a Yahoo pure play--owning no Microsoft shares.

Legg Mason has previously publicly supported Yahoo in its efforts to land a buyout bid beyond Microsoft's initial offer. Legg Mason was among roughly half a dozen of Yahoo's largest shareholders who were heavily wooed by both companies this past week.

Nonetheless, Yahoo may find itself facing more than just pressure on its stock come Monday.

"They'll get a call tomorrow. I'm shocked this deal didn't get done. They're idiots," said a source familiar with the investors' thinking.