Microsoft Walks Away From Yahoo Acquisition

Redmond (WA) - Microsoft has pulled the emergency brake and decided that it will not pursue a purchase of Yahoo. In a letter sent to Yahoo co-founder and CEO Jerry, Microsoft CEO said that Yahoo’s demands of a 70% premium of the company’s closing price on January 31 were unreasonable and he made it clear that Yahoo’s decision to strike a deal with Google’s advertising solutions were the decisive blow to kill the deal altogether. We are now waiting Yahoo stockholders suing the company and Google continuing its current pace of growth.

In the end, Yahoo may have gambled away its opportunity to merge with Microsoft and one promising opportunity to take one Google’s dominance in search advertising. According to Ballmer, Microsoft was willing to raise its bid "by roughly $5 billion" to $33 per share, but Yahoo demanded another $5 billion or a per-share price of about $37. "Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer," Ballmer wrote in the letter to Yang.

"After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," said Ballmer. The executive also said that he would not pursue a proxy contest against Yahoo.

In particular, Ballmer criticized Yahoo’s intent to collaborate with Google and its advertising solutions, a move that was widely considered to be put in place to upset Microsoft. "We regard with particular concern your apparent planning to respond to a ’hostile’ bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons," Ballmer wrote.

Microsoft believes that such a decision would "fundamentally undermine Yahoo’s own strategy", "impair" the company’s ability to retain key talent, create a "host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit", "enable Google to set the prices for key search terms", and "foreclose any chance of a combination with any other search provider that is not already relying on Google’s search services."

"Accordingly, your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft’s proposal to acquire Yahoo," Ballmer concluded.

Going forward Ballmer said that Microsoft will rely on growing and building its own business and "strategic" partners. He also noted that he believes that Microsoft’s offer represented a "fair" offer and by not accepting it, Yahoo and its stockholders "have left significant value on the table."

While Microsoft may be considered the loser in this acquisition battle, the winner clearly is not Yahoo. Yahoo has been losing search share for at least two years to Google and has shown no signs that it can reverse that trend. According to Nielsen Netratings, Google held a 58.7% share in March of this year, up from 53.7% in March 2007 and 49.0% in March 2006. Yahoo is currently estimated to hold an 18.1% share, down from 21.8% last year and down from 22.0% in 2006. Microsoft’s MSN/Live Search is listed with a 12.0% share, up from 10.1% in 2007.

It remains to be seen if Yahoo can survive by being squeezed by two giants and whether Microsoft will find ways to accelerate its growth to eventually surpass Yahoo and catch up with Google. Yahoo itself is likely to need a strong partner to survive this battle and there clearly aren’t many companies that could afford to purchase the company and live with the corporate culture of the company.

The clear winner appears to be Google. It will take time until significant change in the search and Internet advertising market can be expected. At least for now, Google can continue to build and expand its search advertising business without having to expand much headwind from either Microsoft or Yahoo - or anyone else. For the sake of competition, that may not be the best outcome for the industry, web publications and the consumer.

  • Mr_Man
    I can't believe they're making this out to be a bad thing. I for one like competition, and think that Yahoo! can pull out of this happier in the end, but only if they stop making the mistakes they've been making in the past.
  • nachowarrior
    lawsuits? from shareholders? Unless you have a MASSIVE amount of stocks in yahoo, you have no reason to be ticked... and even then when you put your money into a company, you leave it to them to make the decisions... unless you own 51% or more, shut up and quit whining. really... if you don't like it, invest elsewhere. That's just how it works. Idiots.
    Having said that. If you invest 10k in yahoo, you're only gaining a minute percentage for someone else to take over the company and DESTROY the company you invested in. Honestly... IMO, yahoo is PROTECTING the stock holders. These are industry professionals, and I think they did the right thing both ethically and economically. I honestly thought about investing in ms after they announced they wanted yahoo so i could reap the benifits after they gave up and the investors came back. I knew they'd never get yahoo, especially with Googles unseen hand working in the background.

    ANYWAY. If you're an investor, and try a lawsuit... Don't bother... you're wasting your money on your bad lawyer.
  • perzy
    It's pretty clear that microsoft has lost it's brilliant founders buisness touch. Although ruthless against the competition, Bill Gates is the reason they became #1. Who said that blondes are dumb?
  • spiralsun1
    Yahoo and Microsoft would have been a great combination, and could have challenged Google. Google is a monster. A great big special-interest Jewish monster which has led the way in internet censorship of sites they did not like. Read California State University professor Kevin MacDonald's book "The Culture of Critique: An Evolutionary Analysis of Jewish Involvement in Twentieth-Century Intellectual and Political Movements" (Paperback) to understand just why we should be worried about this. Probably the most important book of the century and Google, the most important piece on the board in the Jewish strategy to control the minds and politics of America. Microsoft and Yahoo did not lose here, we did. All of us.
  • jhansonxi
    @spiralsun1: I seriously doubt it. I think, and Mike Corley would agree with me, that this merger was obviously an attempt to increase the surveillance capabilities of MI-5.
  • johnbilicki
    I'm not even going to bother reading the article, Google did not win, Yahoo won. As a professional Web Designer and Developer consumers also won. Three choices always beats two unless you're talking about politics, then your only choice is the fourth person still running out of the "allowed official three".
  • aevm
    @nachowarrior: if I invest $10K in Yahoo shares, and Ballmer offers to give me $16K for those shares, I say THANK YOU and accept. If then the CEO of Yahoo comes in and says no you can't have that $6K gift from Ballmer because then Yahoo would be destroyed and I would be out of a nice CEO job, I say I DON'T CARE. Gee, no wonder Yahoo shareholders are suing Yahoo's board. Yahoo's board put their own interests above those of the shareholders, which is illegal, by the way, not just bad for the company.
  • Three always beat 2? ALWAYS? What if the 2 of them are beaten down and are getting beat by the third. Ever hear of economies of scale? I'm not saying this is the case hear but to make such an absolute statement shows you have no business sense whatsoever.

    As for the owners of the company (this would be the stockholders), they have the right to demand how Yang, would generate equivalent value for the owners of the company - based on their abysmal performance recently I don;t see this happening - keep in mind the stock was around $19-20, when the offer was made.

    'If you're an investor, and try a lawsuit... Don't bother... you're wasting your money on your bad lawyer.'

    These types of lawsuits are done on contingency, meaning no out of pocket expenses for the plaintiffs - please stop spouting misinformation/bad conclusions.

    Finally keep in mind Yang could have kept this company PRIVATE, but instead chose to cash in and make millions by taking the company public and selling the majority of it to stockholders. The day he took the company public, he put his decision making (or lack thereof) under scrutiny by the board and by the stockholders. He chose to do this for millions - now he has to live with the consequences... I hope he is removed in short order for lack of fudiciary responsibility.