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Microsoft, Yahoo Exchange Barbs

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War of words intensifies as Yahoo's earnings surprise.

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If Yahoo (YHOO) and Microsoft (MSFT) can't kiss and make up, agree on a price and move forward together, it's time to call off the wedding.

After yesterday's closing bell, Yahoo reported strong earnings numbers for the first quarter, but failed to sway Microsoft to up its takeover bid:

  • Net income rose to $542 million or $0.37 per share, up from $142 million or $0.10 per share a year ago.

  • Revenue increased to $1.8 billion, up 9% from last year.

  • Ad-related growth jumped 18%, but international revenue grew only 7%.


Despite the positive results, The Wall Street Journal reports the war of the words continued between Yahoo CEO Jerry Yang and Microsoft boss Steve Balmer. In defiance of the software giant's offer, Yang said, "The quarter's results underscore the fact that our strategy and investments are beginning to pay off. Our board and management are committed to choosing a path to maximize shareholder value and will not enter into any transaction that does not recognize the full value of this company."

Balmer wasn't impressed. He reiterated that Microsoft will not up its bid. "We know what Yahoo's worth. $44 billion is a lot of money. [We are] prepared to move forward alone without Yahoo."

Many analysts believe if it continues to be rebuffed, Microsoft will take its offer off the table or simply lower the price. Others, perhaps impressed by Yahoo's obstinacy, are convinced Balmer will need to sweeten the deal to get it done. Three weeks ago Microsoft gave Yahoo a deadline for consideration of its takeover bid. Yang and the rest of the board have until Saturday to make their decision.

Tensions have risen to a point where any takeover -- even one at a mutually agreed upon price -- would be effectively hostile. Integrating the two companies would be a massive logistical undertaking; doing so with residual bad blood from a messy takeover battle would be a strategist's nightmare.

Systems, processes and corporate cultures would need to be merged in order for Microsoft to realize a near-term benefit to its investment. Even in the long run, embittered former Yahoo employees may defect or contribute less to their new bosses.

The Internet company has witnessed mild resurgence and newfound unity in the face of being swallowed whole. But if Microsoft calls its bluff and walks away, Yahoo's shareholders may end up wishing they hadn't been so greedy

No positions in stocks mentioned.

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