Bear hug letters are an art form. They are designed to put an unwilling takeover target on notice that they are no longer safe, but to fall short of being blatantly hostile.
Microsoft’s bear-hug letter to Yahoo, made public early Friday along with Microsoft’s unsolicited $44.6 billion takeover bid, is no different. It contains all the nice-nice language you typically see in these letters (this is the hug) as well as a warning that there is a bear waiting to come out.
Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.
So, what is Microsoft really getting at? What is the “bear” here?
Yahoo has a shareholders rights plan, also known as a poison pill, with a 15 percent trigger. As a result, Microsoft cannot effectively acquire an interest in Yahoo above that threshold unless it obtains prior approval from Yahoo’s board.
But if the Yahoo board resists Microsoft’s offer, Microsoft can still pursue a hostile bid.
In the face of an unaccommodating board, the only effective option for Microsoft to force Yahoo’s directors to come to the negotiating table or to otherwise acquire Yahoo is a proxy contest.
Here, the timing of Microsoft’s letter is not random. Section 2.5 of Yahoo’s by-laws require that:
For proposals and nominations to be timely, a stockholder’s notice shall be received by the secretary at the principal executive offices of the Corporation in the case of the annual meeting not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting of stockholders.
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