Yahoo!-Microsoft saga takes another turn as Legg Mason backs Yahoo! board

By Paul A. Harris

St. Louis, July 18 - With just nine trading sessions remaining before the scheduled Aug. 1 Yahoo! Inc. shareholders meeting market watchers seem to agree that the unfolding situation involving Yahoo!, Microsoft Corp. and Microsoft's recently acquired ally, corporate raider Carl Icahn, is becoming interesting.

On Friday Bill Miller, chairman and chief investment officer of Legg Mason Capital Management, which owns approximately 60.7 million shares of Yahoo!, representing a 4.4% stake, stated that Legg Mason will vote its shares in favor of retaining Yahoo!'s present board.

Legg Mason noted that two competing slates of directors have been nominated for consideration at Yahoo!'s Aug. 1 shareholders meeting - one put forth by the company's current board and the other by Icahn.

"We have met with representatives of the current board and management, including [Yahoo!] founder Jerry Yang, several times," Miller stated in the release.

"We believe the current board acted with care and diligence when evaluating Microsoft's offers. We believe the board is independent and focused on value creation for long-term shareholders."

Although it made no specific reference to "short-term shareholders," the Legg Mason press release did note that Carl Icahn has stated that Microsoft Corp. CEO Steve Ballmer has made it clear to Icahn that Microsoft cannot negotiate a transaction with the current board of Yahoo! but would negotiate with a new board led by Icahn.

Legg Mason's Miller ends by stating "If Microsoft wants to acquire Yahoo!, it can make the terms and conditions of its offer public. If Yahoo! shareholders support it, I am confident the board of Yahoo! will accept it."

A tough sell

Clayton Moran, a stock analyst for Stanford Group Co., who covers Yahoo!, told Prospect News on Friday that without a formal bid for the company it might be difficult to persuade Yahoo! shareholders to vote in favor of the slate put forward by Icahn.

"Certainly Microsoft joining with Icahn helps Icahn's chances of winning," Moran said.

"Whether or not that puts them over the edge is very debatable, however.

"Icahn may succeed in getting some seats on the board, but it is a risk for Yahoo! shareholders to change the entire board without a strong commitment from Microsoft to buy all of Yahoo!

"Microsoft's intention to buy only the search business is probably not compelling enough for Yahoo! Investors."

Moran said that in a breakup scenario in which Microsoft acquires Yahoo!'s search business, Stanford Group values Yahoo! stock at approximately $24 per share. Yahoo! (Nasdaq: YHOO) shares finished the Friday session a penny, or 0.04%, better, at $22.45.

In February Microsoft entered a half-cash/half-stock bid for Yahoo! that was then valued at $31 per share, and Yahoo! shares rocketed toward $30. Subsequently Microsoft shares sold off, eroding the all-in value of the bid, according to market sources.

In a recent letter to his company's shareholders, Yahoo! CEO Jerry Yang stated "we will sell the entire company to Microsoft for $33 per share or more if Microsoft will negotiate a transaction that delivers certainty of value and certainty of closing"

"The ball certainly is in Microsoft's court," Stanford Group's Clayton Moran observed.

"I think if they decided that they wanted to revisit acquiring Yahoo! there is a good chance they could get a deal done now.

"But the public indications from Microsoft are to the contrary. So investors should probably not get into Yahoo! stock based on that hope."

Parsing the options, including the above - i.e. Icahn succeeds in seating his board slate and dismantles Yahoo!, or Microsoft puts in a new higher bid - Moran added that a third option is for Yahoo! to continue to run as an independent company.

"From that perspective Yahoo! continues to be challenged by a fragmenting internet, by a stronger brand from its main competitor, Google, and by the current economic weakness," the analyst said.

"Without any deal whatsoever Yahoo!'s stock probably goes lower."

ICAP eyes $34

Meanwhile in a Friday email message, Sachin Shah, special situations analyst for ICAP Securities, said that ICAP values Yahoo! shares at $32.50 on a stand-alone basis and expects $1.50 per share more in synergies allocated to Yahoo shareholders, resulting in a total price of $34 per share.

"Basically at $33 per share, Microsoft shareholders could get $16 billion in net present value of synergies," he wrote.

Noting that Legg Mason's stake in Yahoo! is second to that of Capital Research & Management Co., Shah added that if Capital Research and Capital World Investor - which, together also own approximately 6% of Microsoft - come out in support of Yahoo!'s board, it would put more pressure on Microsoft to make a more compelling offer, or even an offer for the entire company.

"Microsoft had operating losses of $1.2 billion in fiscal 2008 in its online services business and is expecting $500 million in expenses in fiscal 2009," Shah wrote.

"That's not great organic strategy.

"If Microsoft is committed to its online strategy, they have to be committed to making constructive decisions to that end.

"Acquiring Yahoo is their solution.

"As we speak, Microsoft stock is down approximately 20% since their Feb. 1, 2008 offer [for Yahoo!]."

At Friday's close shares of Microsoft (Nasdaq: MSFT) were off 6.03%, or $1.66, ending at $25.86. Slightly less than 147.959 million shares were traded - more than twice the average daily volume.

Elsewhere in the technology sector shares of Google Inc. (Nasdaq: GOOG) plummeted 9.77%, or $52.12 per share, to close at $481.32.

Teva to acquire Barr

Teva Pharmaceutical Industries Ltd. announced Friday that it will acquire Barr Pharmaceuticals, Inc. in a cash and stock transaction valued at $7.46 billion plus the assumption of approximately $1.5 billion of debt.

Under the terms of the agreement, each share of Barr stock will be converted into $39.90 in cash and 0.6272 Teva ADRs. Based upon the unaffected Nasdaq closing price of Teva's ADRs on Wednesday, the indicated combined per share consideration amounts to $66.50, according to the Friday press release.

The purchase price represents a premium of 32% to Barr's average daily closing price on the New York Stock Exchange for the 52-week period ending on Wednesday, and 42% to the Wednesday closing price.

Teva intends to fund the cash portion of the deal by using cash on hand and marketable securities and by approaching the long-term debt market for the remaining balance.

Teva expects the transaction to close in late 2008 and to become accretive to GAAP earnings in the fourth quarter after closing.

The merger agreement may be terminated if Barr's board accepts an unsolicited superior proposal prior to approval of the merger by Barr's stockholders.

There is a $200 million termination fee.

Barr Pharmaceuticals (NYSE: BRL) gained 10.95% on Friday, to close at $63.43, $6.26 higher on the day.

Teva (Nasdaq: TEVA) shares also advanced, gaining 4.43% or $1.82, to close at $42.87.

Friday's situations took place against a backdrop of mixed performances on the part of the major U.S. stock indexes.

The Dow Jones Industrial Average was the session's outperformer, gaining 0.44%, or 49.91 points to close at 11,496.57.

The S&P 500 was flat, up 0.03%, or 0.36 points to close at 1,260.68.

The technology-heavy Nasdaq, on the other hand, saw a substantial negative percentage move as it fell by 1.28% to close at 2,282.78, down 29.52 on the day.

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