Yahoo board says “no” to Microsoft but so what?

Yahoo LogoReuters is reporting that Yahoo is rejecting Microsoft’s bid (as are the WSJ and NYT, of course) and various folk in the blogosphere are now pontificating on whether or not it makes sense for fragile Yahoo (Nasdaq: YHOO) to spurn the advance of rich suitor Microsoft (Nasdaq: MSFT).
A few quick examples of the commentary: “From the apparent wording from a source — that the bid is “massively undervalued” given the relatively recent swoon in Yahoo’s stock price before the bid and the risks of the bid getting rejected on antitrust grounds — it sounds like this is pretty standard negotiating fare, not a realistic intention to go it alone.” That’s Rob Hof of BusinessWeek talking, and rather to my surprise he doesn’t note the obvious: the reason Yahoo’s stock has risen is because of the potential acquisition, so Yahoo trying to leverage that is somewhat like a dog chasing its own tail.
Sticking to the BusinessWeek gang, Arik Hesseldahl writes: “in grabbing Yahoo, Microsoft is trying to re-fight a war it has already lost to Google. Better to cut lose those business units where Microsoft isn’t a leader, pour some resources into research and development, and to try and get ahead of the next important trends on the Internet.”
Arik, you’re wrong. Microsoft hasn’t lost the war, they’ve used the wrong tactics to take a lead and failed on individual battlefronts instead. Yahoo in the aggregate might not be worth $44 billion (as I’ve already written about) but there are certain key properties that are fabulous additions to the Microsoft portfolio (think Flickr). Further, Microsoft R&D hasn’t had a great track record either. (disclaimer: I worked for years at HP Labs and saw first hand how a research lab full of brilliant scientists doesn’t necessarily translate into a better product lineup for the company. A long, complicated explanation but Microsoft pouring billions into R&D will not produce a stronger Microsoft in the future)
The ever-controversial Mike Arrington, on TechCrunch, says: “Perhaps this ordeal finally jolted Yang out of whatever alternate reality dreamland he was dwelling in. Perhaps the board saw some fire in Yang’s eyes at the meeting yesterday that made them willing to put their personal fortunes on the line and give a collective middle finger to Microsoft.” Mike, you’ve missed the point…
Mashable writer Paul Glazowski also misses the point: “Is it greed that’s being exercised today? I would say no. At least not entirely, anyway. I would instead presume this move to be a tactical maneuver employed by the board to disabuse Microsoft of the notion that it will have an easy acquisition.” I agree that this is a tactical move by the all-too-invisible Yahoo board, but here’s what few people seem to be realizing:
It doesn’t matter if the Board approves the offer from Microsoft because it’s a hostile offer.
What we need to be doing is paying attention to the institutional investors and other major stockholders here. Even if they lack controlling interest in the firm with their combined holdings, there’s a long history of hostile takeovers proving effective simply because a single stockholder then has sufficient leverage to gain a seat on the board and then to influence the direction of the corporation.
Don’t believe me? Yahoo Finance reports that institutional investors own 71% of Yahoo shares.
That means that if they say yes, it doesn’t matter one iota what the Yahoo board says.
So, as I say in my title: Yahoo Board of Directors say “no” to the acquisition offer but… so what?

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