I was happy to see the Wall Street Journal article reporting that Yahoo!’s board plans to reject Microsoft’s offer. Also, the optimist in me hopes that they can continue to stave off Microsoft because of the poison pill adopted in March of 2001. The press has made a lot of allusions to the poison pill, but nobody has really explained how it works. I am not a securities lawyer, but I decided to try to interpret the SEC filing and the corresponding rights agreement and translate them into plain English. Here is my understanding (any securities lawyers out there who want to correct me, please do so!):
If you own common stock in Yahoo!, you have the right to buy preferred shares at the price of $250,000 per share for each thousand shares of Yahoo! common stock you hold. This is a pretty useless right, because preferred stock has no voting privileges, and although preferred stock is entitled to dividends before common stock is, Yahoo! has never paid a dividend, so preferred stock in Yahoo! has no value.
But, your right to buy those preferred shares includes a little magic spell: If a person or company tries to acquire Yahoo!, then once that “Acquiring Person” holds 15% of Yahoo!’s stock, you magically have the right to buy common stock at 50% of its current market price. But the Acquiring Person (or company) does not have that right. Why does this matter? If Yahoo!’s board refuses to sell the company to Microsoft, but Microsoft really, really wants to own Yahoo!, Microsoft could try a hostile takeover of Yahoo! by purchasing Yahoo! stock on the open market, with the ultimate goal of controlling more than 50% of Yahoo! stock. This is not exactly as straightforward as it sounds, but it’s still very doable.
So what happens in this scenario? As Microsoft is buying up Yahoo! stock, at some point they will cross the 15% ownership threshold, and when that happens, the other 85% of Yahoo!’s stock will, in effect, undergo a 2-for-1 split. The price of your Yahoo! stock will drop by about 42% (or maybe less), but you will be happy about this because you will suddenly have twice as many shares as you did before. Your investment in Yahoo! will go up in value by about 16% (or maybe more). Microsoft’s 15% stake in the company will be transformed into a 7.5% stake, and Microsoft will have to lay out more cash than it originally intended if it wants to go ahead with the acquisition.
Now, don’t get too excited if you are a Yahoo! shareholder — this windfall is not entirely guaranteed. Yahoo!’s board can cancel the poison pill if they receive an offer that they think is fairly valued, but for now it looks like they will require a lot more than $31 per share before they do that. At least Yahoo!’s board understands the value of what they have. Now all they need to do is stave off Microsoft and fix Yahoo! to unlock all of that value hidden under their bureaucracy.
1 comment so far ↓
Another good post, John. The first thing I did when I heard about the bid was check out EDGAR to see what was in place. Let’s hope it doesn’t come to this, though. I figure we’d get a proxy fight before MSFT plans a hostile takeover. They barely have enough cash on hand to buy half the shares, and they won’t want to spend all of it. A leveraged buyout would be pretty expensive in this market, especially with the poison pill.
Whatever happens, I’m glad the board isn’t just lying down. If we’re gonna get screwed, I’d prefer getting screwed at $40 a share.
Added your feed. This is good stuff, keep up the blogging!
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