San Francisco — Microsoft Corp. is measuring it bid amidst slowing U.S. economy, whether to cut its $44.6 billion offer for Yahoo! Inc. because the Internet Company may have lost value since Microsoft made its offer, people familiar with the matter said on Friday.
The news, first reported by Reuters, sent Yahoo shares dropped down roughly 5 percent in extended trading, as rumors swirled Microsoft was considering lowering its buyout bid for the Internet search pioneer.
The companies so far have not made any progress on negotiations since Yahoo rejected the bid in February, and there are signs that Yahoo’s business has since deteriorated, one of the people said. They declined to be named because the talks are private.
At the onset, Microsoft offered $44.6 billion, or 62 percent above Yahoo’s market price. The deal is currently valued at about $41 billion, based on Friday’s closing share prices.
Yahoo’s board formally turned down Microsoft Corp.’s bid, saying it underestimates the company. The Silicon Valley Company has since explored alliances with Google Inc., News Corp.’s MySpace.com and Time Warner Inc.’s AOL, but no alternative to Microsoft’s offer has surfaced.
“Yahoo spokeswoman Diana Wong refused to make statement about assertions that the Web portal company’s business is declining.”
The likelihood of a lower bid may intensify pressure on Yahoo Chief Executive Officer Jerry Yang, who had searched for an alternative that would appeal to investors. Since then, Federal Reserve Chairman Ben Bernanke has said the U.S. may be in a recession after losses tied to the collapse of the sub-prime mortgage market.
“They are probably realizing that by the time the fight is over, Yahoo’s value will have decreased a bit in the current macro environment,” said Jeffrey Lindsay, an analyst at Sanford C. Bernstein & Co. in New York. Yahoo’s “best opportunity was to take the Microsoft offer and turn it into friendly negotiations.” He expects Yahoo to perform in line with its peers.
Yahoo and Microsoft equally suffered a loss of less than 1% of their share of U.S. Web searches in February, the most recent month for which data are available, according to the research group comScore. During that month, Yahoo grabbed 21.6 percent of searches, more than Microsoft’s 9.6 percent. Google Inc.’s share rose less than 1 point to 59.2 percent.
After a long silence, recent observations from various sources to journalists suggest the software maker is hardening its stance and pushing Yahoo for action.
Microsoft is trailing Yahoo to combine the second and third most popular U.S. Internet search engines to take on Google Inc., which now gets more than half the queries. Before the offer, Yahoo had reported eight straight quarters of profit declines. Yang, who co-founded the company, replaced Terry Semel as CEO last year to reignite growth.
The sources informed Reuters that Yahoo has lost key personnel, making the company less valuable, while generous severance packages it handed out to executives and full-time employees in the case of a takeover have made it more expensive.
The sources familiar with Microsoft’s think tank, on Friday said the company has been very tolerant — but will be so only to a point.
“Now it is up to Yahoo’s board to take part in meaningful negotiations with Microsoft,” the person said.
High-ranking executives of both the companies have met this week near Yahoo’s Sunnyvale, Calif. headquarters but walked away without advancing the negotiations, according to The Wall Street Journal.
For Microsoft, the threat of bringing down its bid may be as effective a weapon as waging a proxy fight or an exchange offer. In part, it would permit the software giant to come out to choose the high road in its battle to bring Yahoo to the negotiating table, without possibly alienating Yahoo’s employees, which the software giant hopes to retain in a merger.
“Spokespeople for both the companies declined to comment when inquired about the meeting.”