Ever since Yahoo rejected Microsoft’s $31 a share offer to buy the company, the two sides have been gearing up for a prolonged fight over Yahoo’s fate. Microsoft is preparing to try to unseat Yahoo’s board members in a proxy battle that could cost as much as $30 million (which is still cheaper than raising its bid). Yahoo, for its part, amended its severance plan to cover all employees in case of a change in control of ownership. It includes accelerated vesting of options, continued severance pay of between four to 24 months of each employee’s base salary, plus $3,000 to $15,000 in outplacement services per laid-off employee. And there are going to be a lot of those after the merger. Henry Blodget estimates this severance plan alone will cost Microsoft an additional $1 and $3 billion, which pretty much wipes out the $1 billion in savings Microsoft thinks it can get from merging the two companies (i.e., by laying off redundant employees).
It is in Yahoo’s interest to keep fighting and adding poison pills to any takeover attempt. The longer this drags out, the more likely that Microsoft will raise its bid or lose heart. Could Microsoft already be rethinking its hostile-takeover strategy? It’s stock has taken a hit since it announced its bid and most of the press has been negative on the deal, pointing out the challenges of large mergers. The fact that this is a hostile attempt adds to the uncertainty. Hostile takeovers tend to work best when the targeted company has some hard assets that can be stripped and sold off or ripped apart and recombined in new ways.
That is not the case here. For this merger to work, Microsoft will need to retain the best employees (many of which are already fleeing Yahoo) and keep its customers happy. It can’t do that if it is preoccupied with merging two very different cultures and paying less attention to the Web properties that Yahoo’s business depends on. Of course, even if Microsoft loses its resolve, Yahoo would still need a strategy to compete.