Microsoft bid plunges Yahoo into uncertainty

Having been dragged to the courts in seven cases over a takeover attempt by Microsoft, internet major Yahoo has said the bid was creating "distraction" in its business and its shares could weaken if the deal falls apart.

"Microsoft's unsolicited acquisition proposal has created a distraction for our management and uncertainty that may adversely affect our business," Yahoo said in its annual report for 2007 being sent to its shareholders.

Yahoo had received a hostile takeover offer worth about $45 billion from Microsoft on January 31.

Later on February 11, Yahoo replied that its board has rejected the offer, which it considered to be undervaluing the company.

"The review and consideration of the Microsoft proposal (and any alternate proposals that may be made by other parties) have been, and may continue to be, a significant distraction for our management and employees and have required, and may continue to require, the expenditure of significant time and resources by us," Yahoo said in its annual report.

Yahoo said Microsoft's bid has also created uncertainty for its employees and this might adversely affect its "ability to retain key employees and to hire new talent" as well as its relationship with existing and potential customers and business associates.

"Additionally, we and members of our board of directors have been named in seven purported stockholder class action complaints relating to the Microsoft proposal... These lawsuits or any future lawsuits may become time consuming and expensive. These consequences, alone or in combination, may harm our business," Yahoo said.

Regarding the potential impact on its share price, Yahoo said, "as a result of Microsoft's unsolicited acquisition proposal, and speculation concerning a potential acquisition, the future trading price of our common stock is likely to be volatile and could be subject to wide price fluctuations."

"There can be no assurance whether a transaction will occur or at what price. If a transaction does not occur, or the market perceives a transaction as unlikely to happen, our stock price may decline," it noted.

The internet major also said volatility or a weak performance of its shares might "adversely affect our ability to retain key employees, all of whom have been granted stock options or other stock-based awards."

Detailing the cases filed against it in relation to Microsoft's bid, Yahoo said since February 1, four separate shareholder lawsuits have been filed in the California Superior Court, Santa Clara County, against Yahoo! Inc, members of the board of directors and selected former officers by plaintiffs Edward Fritsche, the Thomas Stone Trust, Tom Turberg and the Congregation Beth Aaron.

The complaints allege that the Yahoo board of directors breached fiduciary duties in connection with Microsoft's unsolicited proposal to acquire Yahoo.

The plaintiffs in two of the California lawsuits alleged that Microsoft's was inadequate and Yahoo board breached fiduciary duties by favouring Microsoft's unsolicited proposal.

The plaintiffs in the other California lawsuits alleged that Yahoo board breached fiduciary duties by, among other things, failing to negotiate a transaction with Microsoft or other potential bidders in the past and presently.

Besides, since February 11, three separate shareholder lawsuits have been filed in the Court of Chancery of the State of Delaware against Yahoo! Inc and members of the board of directors by plaintiffs, The Wayne County Employees Retirement System, Ronald Dicke, and The Police and Fire Retirement System of the City of Detroit along with The General Retirement System of Detroit.

The plaintiffs in these lawsuits have alleged that defendants breached fiduciary duties by rejecting Microsoft's offer without fully informing themselves whether Microsoft would offer additional consideration and that defendants are not acting in the best interests of shareholders and are seeking to entrench themselves.

One of the Delaware lawsuits alleged that the board has pursued various blocking transactions, adopted an employee severance plan, and a shareholder rights plan in violation of fiduciary duties.

"We may incur substantial expenses in defending against such claims, and it is not presently possible to accurately forecast their outcome," Yahoo said.