Yahoo's hostility towards its purchase by Microsoft didn't only hurt feelings in Redmond. A number of shareholders were hoping for a sale at a significant premium over Yahoo's trading price and, with the collapse of the deal, at least one class-action lawsuit has erupted. The law firm managing the suit on behalf of various Detroit governmental retirement funds has been placing the relevant documents online and, thanks to a ruling issued earlier today, they've placed an unsealed complaint (PDF) online that contains internal e-mails detailing Yahoo's attempts to scuttle any deal with Microsoft. The document's release came over the objections of Yahoo.

The lawsuit is based on the assertion that selling out to Microsoft is in the best interest of shareholders, who would have received a premium share price for a company that's become search's perpetual second-place finisher. It turns out that Yahoo had several opportunities to cut such a deal, as discovery has uncovered two offers a year from Microsoft dating back to 2006, including one from January 2007 that valued Yahoo at $40 a share. At the time, the stock was worth less than $30 a share.

Publicly, Yahoo management, including its board, didn't see any of these past overtures as sufficient. Once Microsoft went public with an offer, that same management tried to extract a higher buyout price from them, which could be construed as acting in the interest of its shareholders. The suit alleges, however, that nobody at Yahoo was ever interested in an agreement, and that the firm's leadership did its best to prevent the deal going through.

To that end, it paints Jerry Yang and David Filo, who have an emotional attachment to the company they founded, as the worst people to be heading Yahoo's negotiating team. It also suggests Yang has an irrational hatred of his long-time competitors from Redmond. Yahoo's board is portrayed as the embodiment of complacency, as it failed to demand independent evaluation of the actions taken by Yang and simply handed him the reins. Although the suit clearly benefits from presenting a negative picture of the management's actions, it's one that appears to be consistent with press accounts of the negotiations, many of which are cited in the suit.



MS: "They are going to burn the furniture if we go hostile."

What's new about the documents released today is that they detail some of the measures the management took to ensure Microsoft didn't pursue a hostile bid. Most companies, when faced with the threat of a buyout they don't want, make arrangements so that the buyout would entail additional costs. The approach is called a poison pill—swallow the company, take the poison. In this case, the pill included a series of measures that would make it more financially lucrative for Yahoo employees to leave the company postmerger, meaning Microsoft wouldn't be getting all that it paid for.

Part of the expense would come from accelerated vesting of stock options. In short, if the buyout went through, anyone with outstanding stock grants would have all of them vest immediately. The e-mails included in the document contain a succinct response to this from an outside compensation consultant: "That's nuts." The suit suggests that Microsoft had set aside approximately $1.5 billion beyond the purchase cost to help retain Yahoo employees; the cost of the stock plan is estimated to have been roughly equivalent.

But Yahoo wasn't done. They added an employment clause such that any change in job responsibilities up to two years after the merger that resulted in a "substantial adverse alteration" of an employee's position would enable the employee to quit and receive a substantial severance package. The result of this change, the suit claims, is that it would be more lucrative for most employees to leave, forcing Microsoft to spend enough to match the severance benefits. The law firm estimates the total costs of these measures for Microsoft at $2.1 billion, given their offer of $31 a share for Yahoo. Negotiations later raised that figure to $35 a share, which would have upped the cost to $2.4 billion. Interestingly enough, back in January 2007, Microsoft floated a $40-per-share price to then CEO Terry Semel, which he rejected, according to the filing.

At the time, one Microsoft executive involved in the negotiations suggested that, "They [Yahoo] are going to burn the furniture if we go hostile." The documents leave little doubt that this was an accurate assessment. The suit also notes that Yahoo took steps to complicate a non-hostile deal, such as launching a partnership with Google that would lead to inevitable antitrust worries. The suit suggests that this deal was part of a mindless "anyone but Microsoft" strategy, as it quotes Yang as describing advertising as a part of Yahoo's growth plan. Elsewhere, Yang suggested adopting Google for Yahoo's search as a bad idea because it would create, "an effective monopoly."

With both hostile and amicable buyout options looking unpleasant, Microsoft was left little choice but to back out. This doesn't mean that the shareholder case is so clear-cut. Yahoo will undoubtedly argue that remaining independent was in the best interests of its shareholders, and it seems quite probable that some of their management passionately believed this.