So, What Now for Microsoft and Yahoo? More Fancy Footwork

I’m no M&A expert, but I’ve seen enough not to be surprised by Yahoo’s apparent, imminent rejection of Microsoft’s offer to buy the company. So why are so many people wondering why Yahoo would make a counteroffer?

Really, why would they do anything else? They may get sued if Microsoft drops the deal, but that seems unlikely. If they meekly accepted Microsoft’s offer, however, they most certainly would get sued for not at least trying to do better. It seems like Yahoo has little to lose in engaging in negotiation, if indeed that’s what it’s doing. (Update: And now, it may have a new negotiating tactic: a possible acquisition of AOL.)

And despite some admiration for Yahoo finally seeming to take a stand for its independence, that’s probably little more than wishful thinking by Valley types who never like to lose to Microsoft. It seems unlikely that Yahoo hired all those lawyers and i-bankers and PR people well-schooled in M&A to avoid a deal. They were hired to help Yahoo make the best deal, even if it didn’t want that deal in the first place.

So let’s say come Monday, assuming Yahoo files what amounts to a counter-offer, the game’s on. What then? More corporate choreography. Microsoft may come back with a somewhat sweetened bid, or say, “Sorry, that was our best offer” and we in the media and blogosphere will fill up Techmeme with more rumor and speculation. Fact is, nearly all of the various scenarios are guesswork.

Whatever happens, though, probably has to happen relatively soon, because deals like this start to decay like day-old fish pretty quickly. The hedge funds that bought up shares after the bid are not exactly long-term investors, for one, and even some current investors have already filed suit. Even the big, longer-term investors such as No. 1 Yahoo holder and large Microsoft holder Capital Research and Management no doubt will pressure both companies to settle things sooner than later. And small Yahoo investors won’t be happy about lengthy delays either. Eric Jackson, who led a small shareholder group last year that asked for the ouster of then-CEO Terry Semel, has just launched a new campaign asking for shareholders to band together to negotiate with Microsoft directly. “This board is playing chicken with our shares,” he told me. “We’re not going to sit back and watch the stock price crater to $17.”

Then there’s that March 14 deadline for Microsoft to file a proposed slate of new directors if it decides it must go truly hostile. And not least, Yahoo’s options remain just as limited as they were a week ago.

So while either side could pull something irrational—more irrational, that is, than trying to take on Google with a massive merger of two very different companies both trailing the search giant badly—it still seems likely we’ll see a deal before long.