John W. Schoen Senior producer • Profile • E-mail

Microsoft's recent bid to take over rival Yahoo — whose board of directors has said "No thanks" to the offer — has touched off the latest example of the cat and mouse game known as a hostile takeover. So why does it have to be so hostile? Can’t Microsoft just call up a stock broker and start buying all of Yahoo's shares?

If Microsoft has the money to buy Yahoo! why can't they just purchase the shares via the stock exchange? It may take more time buying it a little piece at a time but eventually couldn't Microsoft buy all the shares they want?
— A.J., Rochester, Minn.

It’s been awhile since merger mania produced a wave of high-profile takeover battles, but Microsoft’s recent bid for Yahoo is following a fairly well-worn path in the corporate acquisitions game. (Msnbc.com is a joint venture of Microsoft and NBC Universal.) In theory, buying another company is a simple matter of buying all of its shares in the public market. But over the years, Wall Street’s lawyers and investment bankers have developed a complex playbook of offensive and defensive maneuvers that make the process anything but simple.

When one company wants to take over another one, it’s much easier — and cheaper — to arrange a “friendly” deal that has the blessing of the target company’s board of directors. What Microsoft originally tried what’s known in the trade as a “bear hug” — a highly public offer designed to look so attractive to shareholders that the company’s management goes along with the plan.

But Yahoo’s board of directors decided to not go along with the deal, saying they think their shareholders can do better. They may be trying to get Microsoft to raise its $31-a-share offer. Or they may be hoping another bidder — a so-called “white knight” — will come along and offer more money. Or the board may think Yahoo stock’s recent slump — from more than $33 a share last fall to $19 a share just before Microsoft’s bid — is temporary.

Having failed to win over Yahoo’s board, Microsoft could just start buying stock on the open market. But it would run into one of the more effective obstacles in the takeover defense playbook, a provision known as a “poison pill.” This measure says that if a hostile bidder buys 15 percent of Yahoo’s stock, the company can flood the market with new shares that sell for a steep discount to the market price.

The idea is to make it almost impossible for the acquiring company to swallow up all the shares of its target. Some companies take these defensive measures to extremes with defensive provisions that make them extremely unattractive as a target, like spinning off their best assets or triggering a large debt payment, also known as “suicide pill” or “scorched earth” defenses.

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Another way to get around an uncooperative board of directors is to replace them — with a so-called proxy fight. Some companies “stagger” their board of directors, with terms that expire in different years so they can’t all be replaced at once. (Yahoo hasn’t done that.) To remove a board, you have to get a new slate of directors listed on the proxy ballot that is sent to shareholders every year before the annual meeting, usually in the spring. Microsoft has until mid-May to nominate candidates who would go along with its offer; it would then have to wage a campaign to get a majority of shareholders to vote for its hand-picked candidates.

Proxy battles are often fought on two fronts: public and private. Publicly, companies engaged in a proxy war often take out full-page ads trying to convince shareholders of the wisdom of their position. Privately, proxy combatants contact investors holding the biggest stakes to try to line up their vote. Though Yahoo has 1.3 billion shares outstanding, roughly 70 percent of them are in the hands of 526 fund managers (as of the latest filing.)  And more than a third of Yahoo’s stock is held by the top 10 biggest shareholders.

So it’s a safe bet those fund managers’ phones have been ringing of the hook lately.

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