Class action lawsuits made by shareholders typically take place after the stock price of a company has dropped significantly. The lawsuits are filed in hopes to find some restitution for losses. Unfortunately, by the time a class action suit is filed, the damage has already been done and rarely do the shareholders receive any significant recovery of losses. Some board members may be ousted, indictments may take place, and perhaps some sentences made, but in my opinion class action suits do very little to help shareholders. The attorneys are typically the biggest winners.
Therefore, it must stand to reason that when class action lawsuits follow a 50% increase in the stock price, the lawsuits must have some merit. Oddly enough, I believe that this is the case with the slew of class action lawsuits that have been made against Yahoo! for denying Microsoft’s bid to buy them out. On February 1, 2008, Microsoft made an offer to acquire Yahoo! for $31 a share. The stock skyrocketed almost 50% overnight. Ten days later Yahoo! denied the bid, stating that it undervalued the company. The class action lawsuits came shortly after.
Just as rare as it is for a class action to come after a huge increase in the stock price, I think the Yahoo! class action lawsuits are justified. I hope that it will also result in a rare win for the shareholders. It will be difficult for Yahoo! to ignore the loud and disgruntled mob, especially when it is well within the power of the board of directors to unlock the value being sought. Although Yahoo! is finding it difficult to “swallow its pride” and accept the bid, ultimately it is probably in the best interest of the shareholders to allow the acquisition to take place. Yahoo! is currently scrambling to make a better deal with someone (anyone) else, but they will be hard-pressed to come up with something that is going to satisfy the shareholders and provide the value they deserve.