One gets the feeling that Microsoft and Yahoo are both putting their armor on, in preparation for a hostile fight.  Perhaps they are hoping for peace, but preparing for war.  Microsoft is preparing to nominate a slate of directors by March 13, in anticipation of a proxy fight.  A proxy fight will be cheaper to wage than a hostile tender offer, won't trigger Yahoo's poison pill, and might create an atmosphere more like Blasius than Unocal.

Meanwhile, Yahoo is offering all of its full-time employees generous severance packages that will kick in if they are terminated without cause in the two years following a merger.  Although Yahoo claims these packages are designed to "prevent an exodus of employees," they seem designed to increase the costs of a hostile takeover.  Microsoft believes there are synergies to be had from a merger, and synergies usually entail the termination of employees in redundant areas.  Now, any synergies to be gained from that strategy may cost more than would be saved.  Yahoo's plan is also suspicious given the fact that Yahoo's own management has begun laying off employees.  The severance plan does not apply to a Yahoo management-inspired exodus, only terminations after a merger.  This plan may backfire, however, if it also raises costs for any white knight that Yahoo was courting.  Perhaps the institution of the plan signals that no white knights have been forthcoming.

My Securities students are keeping me informed on this merger.  Two students sent me the link to Yahoo's poison pill, which has a 15% trigger.  Poison pill is here.

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