Microsoft, Yahoo Stalemate Could Lead to Proxy Contest

Despite its pursuit of alternatives to being taken over by Microsoft, Yahoo’s options appear to be down to accepting the software maker's $41 billion takeover offer, returning to the bargaining table in hopes of drawing a modestly higher bid, or succumbing to a long and potentially ugly proxy contest, according to a news analysis reported by the Seeking Alpha web site.

Microsoft, who reportedly will not increase its offer for Yahoo, is said to be gearing up to take control of Yahoo's board of directors. All 10 of Yahoo's board members are up for re-election at the company's next annual meeting. Microsoft must nominate its slate of candidates by March 13.

According to analysts interviewed by Seeking Alpha, Microsoft's move to threaten a proxy fight could be enough to force Yahoo to enter deal talks, especially if the Internet company fails to make progress in arranging other deals. The company has been linked to transactions including mergers with News Corp. subsidiary MySpace and Time Warner’s AOL.

"No board wants to be forcibly extracted," said Rob Enderle, principal analyst with Enderle Group, a San Jose, Calif., technology consulting firm.

Another key issue affecting a possible proxy challenge is the significant shareholder overlap between the two companies. Capital Research & Management Co. is the top institutional shareholder in both companies, owning 2.7 percent of Microsoft shares and 11.4 percent of Yahoo's stock. Several of Yahoo's other top institutional shareholders, including Vanguard Group, Barclays Global Investors, State Street Global Advisors and Fidelity Management & Research Co., are also Microsoft investors, the web site reported.

RiskMetrics Group wrote in a report last week that the overlap in ownership could favor Microsoft because shareholders are more likely to be concerned about overpaying for Yahoo than Yahoo commanding a higher price.