FAQ: What's next for Microsoft's Yahoo bid?

FAQ Microsoft faces several financial and legal hurdles on its way to wooing Yahoo to accept its $44.6 billion buyout bid.

Here's a brief FAQ explaining some of the reasoning behind Microsoft's actions Friday and what may be on the horizon for the two Google rivals in the near future.

Q: Why would a company go public with its interest in buying another company? Won't that just drive up the target company's stock and make it more expensive to buy that company?
Yes, it could drive up the target company's stock, but for an interested buyer, it's worth it if its previous repeated, private negotiations have failed. Oracle, for example, recently tried such a maneuver on BEA Systems.

By going public with its interest, rather than just giving up and going away, the interested buyer engages in what proxy solicitors call a "bear hug." For example, Microsoft's public disclosure of its interest to buy Yahoo at a 62 percent premium is designed to exert pressure on Yahoo's board to do a deal with the software giant, according to Morton Pierce, chairman of Dewey & LeBoeuf's mergers-and-acquisitions group in New York.

Q: Does this bear hug tactic often work with companies?
It depends. Typically, a public company issues a statement that its board will consider the offer and review whether it is in its shareholders' best long-term interest. Public companies have an obligation to engage in activities that are believed to be in the best interest of their owners.

Often, it takes a company several days before it issues a follow-up response to the bear hug. And in a number of cases, the company will decline the offer, citing prior private negotiations in which it had determined it was not in the interest of shareholders, proxy solicitors say.

Q: If they turn down the bear hug offer, then what happens?
A target company will often be under great pressure to do something to increase its value beyond what the prospective buyer offered. As a result, the prospective buyer will often make subsequent offers at a higher price. One proxy solicitor, who has been involved in a number of large unsolicited transactions, said he anticipates that Microsoft will make a higher offer.

The target company, however, may rebuff those buyout offers and instead announce other plans to enhance shareholder value, ranging from a stock buyback, the sale of some of its assets, or the hiring of an investment banker to explore other options, including a sale of the company.

Q: Why would the target company announce that it would consider selling itself when there is clearly an interested buyer--the one that engaged in doing the bear hug?
At this point, it is clear that the target company is "in play" for a prospective acquisition. As a result, any other suitors out there that were considering buying the company at one time will suddenly feel pressure to re-evaluate their interest and move swiftly, if they believe it still makes sense, investment bankers say. Other possible suitors may include MySpace.com parent News Corp., AOL parent Time Warner, and AT&T, an analyst with Credit Suisse said.

Q: If the bear hug fails to land a deal for the prospective buyer, what else can it do?
The prospective buyer can run a proxy fight or launch a tender offer. A proxy fight involves running a slate of opposition directors designed to replace some, or all, of the target company's current board at the next annual shareholder's meeting. The hostile bidder's goal would be to install a slate of directors who would be more favorable to selling the company to the interested buyer. In Yahoo's case, parties wishing to nominate their own directors to run against Yahoo's slate of 10 directors who will be up for election in 2008 are required to notify the company no earlier than February 13 and no later than March 14, according to Yahoo's filing with the Securities and Exchange Commission.

The hostile bidder could also launch a tender offer, which basically solicits all the shareholders of the target company, asking them to tender their shares to the interested buyer for a certain price. That price could be a set cash amount, a set number of shares, or a combination of cash and shares. This strategy circumvents the target company's board altogether and is a direct plea to the target company's shareholders. Back in 2003, Oracle launched a tender offer for PeopleSoft, but it eventually acquired the company in a friendly deal.

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