By Yi-Wyn Yen
February 28, 2008

By Yi-Wyn Yen

It appears you can blame Microsoft if Yahoo’s employees start slacking off and business partners flee.

Late Wednesday afternoon, Yahoo (YHOO) submitted a Securities and Exchange report that called Microsoft’s attempt to buy the company a “significant distraction for our management and employees.”

Yahoo says the chaos surrounding the unsolicited bid could result in its losing key advertisers, publishers, clients and talent. It also noted that as a result of the bid it’s  facing seven costly lawsuits from shareholders who want the deal to go through.

Two weeks ago, Yahoo’s ten-member board of directors rejected Microsoft’s nearly $45 billion offer, saying it was too low.

That hasn’t stopped Microsoft (MSFT), with its very deep pockets, from trying to arm twist Yahoo into a deal. Last week Wall Street learned that the software giant was preparing a bitter proxy fight to try to oust Yahoo’s board. Hours later, Yahoo began erecting a defense, notifying the SEC that it would offer its full-time employees enhanced severance packages if a change in ownership resulted in layoffs.

Yahoo’s latest signal flare to the SEC was tacked on at the end of a 10K filing under the section, Risk Factors. Here’s the report:

On February 11, 2008, our Board of Directors announced that, after carefully reviewing the proposal, it unanimously concluded that the proposal is not in the best interests of Yahoo! and its stockholders. The Board further indicated that it is continually evaluating all of the Company’s strategic options. 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. Microsoft’s unsolicited acquisition proposal has also created uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees and to hire new talent. Microsoft’s unsolicited acquisition proposal may also create uncertainty for current and potential publishers, advertisers and other business partners, which may cause them to terminate, or not to renew or enter into, arrangements with us. Additionally, we and members of our Board of Directors have been named in seven purported stockholder class action complaints relating to the Microsoft proposal as more fully described in Part I, Item 3 “Legal Proceedings” of this Annual Report on Form 10-K. These lawsuits or any future lawsuits may become time consuming and expensive. These consequences, alone or in combination, may harm our business.

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