Microsoft Fight for Yahoo

April 28 (Bloomberg) -- Microsoft Corp. Chief Executive Officer Steve Ballmer is weighing a fight to oust Yahoo! Inc.'s board and pave the way for a takeover, after the Internet company let his deadline pass without agreeing to a deal.

Ballmer gave Yahoo an ultimatum to accept a $44.6 billion bid by last weekend. Now he is left to decide whether to walk away or begin the company's first hostile takeover battle. If he fights, he has to consider if he should continue to hold firm on the price or offer a better deal to win over shareholders.

Microsoft, the world's biggest software maker, can't afford to let Yahoo go, said Sachin Shah, an analyst for ICAP Securities in Jersey City, New Jersey. To crack Google Inc.'s dominance of the Internet advertising market, Microsoft is looking to handle more Web searches, sell advertisements with more graphics and videos, and be able to target campaigns and track their success.

``Microsoft does need Yahoo,'' said Shah, a merger-arbitrage analyst, in an interview with Bloomberg Television last week. ``If they didn't, they would have walked away a long time ago.''

Microsoft fell 20 cents to $29.63 at 9:34 a.m. New York time in Nasdaq Stock Market trading. Yahoo advanced 14 cents to $26.94. The value of the bid, originally $31 in cash and stock, has dropped to $29.68 based on Microsoft's closing price last week.

`Committed'

Microsoft has spent billions creating a Web search engine and technology to sell ads, and buying Internet companies such as AQuantive Inc. Acquiring Yahoo would give it the No. 2 spot in the $41 billion online ad market.

Losses at Redmond, Washington-based Microsoft's Internet business widened to $228 million last quarter, and sales rose to $843 million, at the low end of company forecasts. Google, owner of the most used Internet search engine, had $3.7 billion in revenue, excluding sales passed on to partner sites.

Advertising linked to search results accounts for more than half of Internet ad sales. Google handled six times more queries in the U.S. in March than Microsoft, according to ComScore Inc., a Reston, Virginia-based researcher.

``Microsoft is committed to completing the transaction and is unlikely to walk away from the deal,'' Citigroup analysts Brent Thill and Mark Mahaney in San Francisco wrote in a note to clients April 25.

`Quite Generous'

Some Microsoft investors say Yahoo CEO Jerry Yang would lose a proxy fight unless he finds an alternative that will boost his company's shares. Much of the stock is held by arbitragers who would accept $31, said Walter Price, a portfolio manager at RCM Capital Management in San Francisco. The firm owns Microsoft and Yahoo shares.

Ballmer called the offer ``quite generous'' three days ago. ``By this point if they don't agree we would have to take our arguments directly to the shareholders,'' he said after a speech to business executives in Madrid. ``We will see what they do, and we will move appropriately at that point.''

Options include a proxy fight or walking away from the offer and building Microsoft's Web unit without Sunnyvale, California- based Yahoo, using other investments and partnerships, Chief Financial Officer Chris Liddell said.

Yahoo spokeswoman Diana Wong didn't return calls for comment. Yang has said repeatedly that Yahoo is worth more, citing investments in Asia, the company's No. 2 position in Internet searches and potential cost savings of the deal. Seeking an alternative, Yahoo has approached rivals such as Time Warner Inc.'s AOL about a combination.

`Posturing'

Though Microsoft officials said last week that they won't raise the offer, analysts said it's still possible.

``Ultimately, we view this as posturing,'' Heather Bellini, an analyst at UBS AG in New York, wrote in a note April 25.

``Even if Microsoft tried to lower the value of the deal or walk away, we would expect them to eventually come back and raise it in order to consummate the transaction in a friendly manner,'' said Bellini, Institutional Investor magazine's top-ranked software analyst.