Microsoft has dramatically raised the stakes in its attempt to buy the internet group Yahoo, threatening to lower its $44.6bn (£22.4bn) offer and oust the board unless negotiations proceed immediately.
After 26 April, the Redmond-based software giant will launch an aggressive strategy to replace unco-operative directors with people who will vote in favour of the $31-per-share deal proposed in February, according to a letter from Steve Ballmer, the Microsoft chief executive, to the Yahoo board at the weekend.
"If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo board," Mr Ballmer said.
"The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal," he said.
The Yahoo board has repeatedly snubbed the unsolicited Microsoft offer. Although the terms represented a 62 per cent premium on the contemporaneous share price, the directors claim it significantly undervalues the business. And a bullish trading statement this month – including prediction-beating sales estimates of more than 50 per cent growth to$8.8bn this year – was accompanied by calls for more generous terms.
But Mr Ballmer says that Yahoo's delaying tactics have raised his firm's costs in respect of the takeover. Internet businesses are proving particularly vulnerable to a deteriorating economic climate, Yahoo's share of the market is declining, and a generous severance package to Yahoo's board, established in February, will also add to Microsoft's expenses, Mr Ballmer claims. "During these two months of inactivity, the internet has continued to march on, while the public equity markets and overall economic conditions have weakened considerably, both in general and for other internet-focused companies in particular," he said.
Microsoft's strategy is not entirely without precedent. Larry Ellison, the flamboyant chief executive of Oracle, employed similarly aggressive tactics in his takeover negotiations with BEA Systems, which went through last year, and with Peoplesoft in 2004. In both instances, Oracle ended up paying more than originally proposed, prompting Yahoo shareholders to hope that Microsoft will be similarly persuaded. But Mr Ballmer's threats to replace the board represent an extra level of aggression.
Yahoo's directors have sought a series of alternatives to the Microsoft deal. There were discussions of a possible tie-up with Google to help rebuff the bid. Time Warner's AOL internet division and Rupert Murdoch's News Corporation have also been in the frame.
But AOL's $850m purchase of Bebo, the social networking site, last month has pushed any potential Yahoo agreement on to the backburner. And the possibility of a merger with News Corp's MySpace site was ruled out by Mr Murdoch.
"We're not going to get into a fight with Microsoft, which has a lot more money than us," Mr Murdoch said in March. In fact, the value of Mr Ballmer's cash and share offer has already dropped. Fluctuations in the company's own share price brought it down to £29.36 per share at the end of trading on Friday.
Microsoft is not the only firm gunning for the internet market. Google, which has already expressed reservations about Microsoft's planned takeover of Yahoo, in turn faced complaints from Microsoft about its own $3.1bn takeover of online advertising broker DoubleClick, which finally gained regulatory approval last month. The stakes are high: the online ad market, worth $39bn last year, is expected to grow to almost $80bn by 2010.