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How Yahoo's 'Scorched Earth' Strategy Helped Scuttle Deal

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How Yahoo's 'Scorched Earth' Strategy Helped Scuttle Deal
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Yahoo C.E.O. Jerry Yang mapped out a scorched-earth defense against Microsoft, essentially arranging to encourage all 14,000 Yahoo employees to quit if Microsoft succeeded in buying the company earlier this year, newly released court documents suggest.
Yahoo executives also declined to tell its employees that Microsoft was prepared to offer them $1.5 billion in retention bonuses if they would stay with the company after a merger was completed, documents say.
A Delaware state court judge today unsealed a class-action complaint by two pension funds that sued Yahoo's board, claiming it failed to protect shareholders' interests after Microsoft offered to acquire Yahoo for $44.5 billion in January.
The 42-page complaint, filed by the New York class-action spe******t law firm Bernstein Litowitz Berger & Grossman, gives a window into internal discussions at Yahoo, and includes copies of internal e-mails among Yahoo executives.
The complaint asserts that the Yahoo board "handed to Yang responsibility for direct negotiations with Microsoft," and that "none of Yahoo's independent directors attended critical meetings with the company."
As early as January 31, the day Microsoft chief executive Steve Ballmer e-mailed his offer to Yang, Microsoft made clear it wanted Yahoo "employees to be okay" and had earmarked "$1.5 billion for the retention of employees" in addition to the "$5 billion for [the] deal," according to notes made that day by an unidentified Yahoo employee. But that fact was never conveyed to Yahoo's employees.
Meanwhile, Yang was engineering a plan for a "massive employee walkout" in the aftermath of a Microsoft takeover by offering all of Yahoo's 14,000 employees the right to quit his or her job and pocket 100 percent acceleration of their equity rights, if there was "substantial adverse alteration" of their jobs.
Yahoo's compensation consultant calculated that the proposal would cost $1.5 billion, or 3.2 percent of the transaction price. "That's nuts," he concluded in an e-mail.
A Yahoo vice president wrote that it is "a bizarre outcome if people who stick around make off worse financially than people who [are] laid off."
But another Yahoo executive, using Microsoft's four-letter stock-ticker symbol, noted that the plan "will make things increasingly more expensive for MSFT though."
The "double trigger" plan Yang supported would have first required Microsoft to pay benefits to everyone who lost their jobs as a result of the merger; a second trigger would also require severance for people who were still on the payroll if their jobs changed.
A February 14 e-mail exchange between two Yahoo executives—Gred Mrva, vice president of mergers and acquisitions, and John Dillon, senior director of integration and corporate development—shows them candidly observing they would be better off getting fired under the Yahoo.
"You and I will be f***ed as they will find a way to make us work for two more years," Mrva wrote.
Dillon responded by pointing out the double trigger also applied to change of roles. Before a deal could close, he noted, Microsoft would have to ask all remaining employees to waive their right to payment in case their job changed. "And to waive at close, they need to effectively buy us out," Dillon wrote.
The complaint also alleges that Yahoo executives compiled comparative data about similar severance plans from only three other unsolicited takeovers, and in any case never provided the information to any Yahoo director.
Chancellor William Chandler III of the Delaware Chancery Court unsealed the document despite what he said were the "defendants' strenuous arguments" that selective disclosure of the information would prejudice Yahoo at its upcoming proxy contest.
Chandler said the appropriate remedy would be for the release of more information, not less. He encouraged "defendants to release the full text of any communications they believe have been taken out of context or selectively quoted."
For its part, Bernstein Litowitz is pressing ahead with discovery, and will push to depose Yahoo director Arthur Kern, head of the compensation committee.
The lawsuit seeks to invalidate the employee severance plan and ensure that any merger deal maximizes shareholder value.
It also seeks damages if, at the end of the process, Yahoo remains an independent company with a depressed stock price.

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