2nd UPDATE: Yahoo Says Microsoft Bid Creates Distraction

Feb.27, 2008 in Market Outlook

Last Update: 2/27/2008 5:56:02 PM

(Updates throughout with information on Microsoft’s offer and Yahoo’s
restructuring and severance plans.)

By Scott Morrison and Gee L. Lee
Of DOW JONES NEWSWIRES

Yahoo Inc. (YHOO) on Wednesday said Microsoft Corp.’s (MSFT) $41.6 billion
unsolicited buyout offer has been a “significant distraction” for management and
could “adversely affect” the struggling Internet company’s business.

The software giant’s “bear hug” offer, which Yahoo has rejected as too low, could
also impair the Internet group’s ability to retain key employees and has prompted
at least seven shareholder lawsuits, the company said in its annual report filed
with the Securities and Exchange Commission.

The filing marks the first acknowledgment by Yahoo that Microsoft’s offer could
prompt publishers, advertisers and other current or potential business partners
to terminate, or not to renew or enter into, contracts with the Internet company.

The company also said that “the review and consideration of the Microsoft
proposal (and any alternate proposals that may be made by other parties) have
been, and may continue to be, a significant distraction for our management and
employees and have required, and may continue to require, the expenditure of
significant time and resources by us.”

Yahoo had already acknowledged that the bid had created uncertainty for
employees. It recently offered all employees enhanced severance packages - worth
up to two years’ salary for top executives - in the event they are laid off
following a change in control of the company.

The scope of Yahoo’s severance plan was expected to make it more expensive for
Microsoft to reorganize Yahoo’s departments should the software company win
control of its target. Yahoo has already started cutting as many as 1,000 jobs as
part of a previously announced restructuring effort.

Yahoo also disclosed that the company and its board members have been named in
seven purported class-action complaints related to their rejection of Microsoft’s
offer.

Yahoo said four lawsuits have been filed in the California Superior Court, Santa
Clara County, against Yahoo, its board and some former officers since Feb. 1.
Three suits were filed in the Court of Chancery of Delaware since Feb. 11, the
company said.

The lawsuits allege, among other things, that Yahoo and its directors breached
their fiduciary duties by not negotiating with Microsoft or other potential
bidders and didn’t act in the best interest of shareholders.

“These lawsuits or any future lawsuits may become time consuming and expensive,”
the filing said.

Yahoo has said it continues to pursue other strategic alternatives, but analysts
have cautioned that the company’s shares would plummet without a Microsoft deal.
Microsoft is under pressure from shareholders to not raise its offer, and sources
have indicated the company is prepared to go hostile if necessary.

Elsewhere in the SEC filing, Yahoo said it expects 2008 capital expenditures to
be “slightly higher” than capital spending of $602 million for 2007, as it
continues to invest in the expansion of its owned and operated online properties
and services.

-By Scott Morrison, Dow Jones Newswires; 415-765-6118;
scott.morrison@dowjones.com

-By Gee L. Lee, Dow Jones Newswires; 202-862-1346

(END) Dow Jones Newswires

February 27, 2008 17:56 ET (22:56 GMT)

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