The sides fail to agree on price. Microsoft says going hostile would take too long and a pending Yahoo-Google deal is an obstacle
Microsoft (MSFT) announced on May 3 it was dropping its unsolicited bid to buy Yahoo! (YHOO). The surprise move came after a day in which it appeared the two companies might be closing in on a price per share of Yahoo's stock in the mid-30s, between Microsoft's original $31-a-share, half-stock and half-cash offer and Yahoo's original insistence on at least $40 a share.
In a letter to Yahoo CEO and co-founder Jerry Yang, Microsoft CEO Steve Ballmer said Microsoft had raised its original offer, which was valued on May 2 at a little more than $29 a share because Microsoft's stock has dropped, to $33 a share. But he said Yahoo had insisted on at least $37 a share. "Clearly a deal is not to be," he wrote at the end of the letter.
"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer," Ballmer said. "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."
For its part, Yahoo said in a response it has believed all along that Microsoft's offer undervalued the company, whose stock had been considerably higher for much of last year. "From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view," Yahoo Chairman Roy Bostock said in a statement. "Yahoo! is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market."
In his letter, Ballmer also mentioned other issues that made a higher offer unacceptable. He wrote extensively about how unhappy Microsoft was with Yahoo's announcement about two weeks ago that it would run a trial for Google (GOOG) ads to run alongside Yahoo search results.
Yahoo had hinted this past week that a deal with Google could be announced as early as next week. Ballmer said such a deal would make Yahoo unattractive to any acquirer because of the likelihood that regulators could take months examining it and possibly reject it.
Agreement Had Appeared Imminent
Ballmer also ruled out a hostile deal, which he had hinted at just before negotiations appeared to heat up over the last day and a half. He said mounting a proxy fight to replace Yahoo's board or take an offer directly to Yahoo shareholders would delay the deal so long that it would make it less appealing.
He also said Yahoo threatened to take steps during the process that would make the company less attractive. "Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft," he wrote in the letter. He went on to say that a search ad deal with Google would undermine Yahoo's strategy, hurt Yahoo's ability to keep engineering talent, and raise regulatory issues.
However, it's also possible Ballmer concluded that he might not win over Yahoo shareholders without a higher offer. Some large Yahoo shareholders, such as Legg Mason's (LM) Bill Miller, had indicated they wanted around $35 a share.
What's more, those institutional shareholders, along with Yang and co-founder David Filo, collectively hold about a third of the stock. And since individual shareholders often don't vote on proxy issues, it's quite possible Microsoft could have lost a proxy fight.
Yahoo's board also appeared to be concerned about nonprice issues of the deal. For one, they sought protection against the possibility that regulators might nix the deal based on the combined entity's dominance in e-mail and instant-messaging services. Moreover, they were concerned about accepting Microsoft's stock, given that Microsoft's strategy vs. Google wasn't bearing fruit either.
Until late in the afternoon Pacific time on May 3, a deal appeared possible, even imminent. On May 3, Yang and Filo traveled to Seattle to meet with Ballmer and Kevin Johnson, president of Microsoft's Platforms & Services Div. The pair said the board had authorized them to accept $37 a share and nothing less. Yang and Filo said they still wanted more, asking for $38 in recent days. Ballmer told them that Microsoft was prepared to go up to $33 a share.
That's when matters hit a stalemate. Despite concerns in Ballmer's letter about the Google deal, as well as retention bonuses that Yahoo instituted after the offer became public, price was the key issue.
Several Talks Between the Sides
The discussions May 3 were just the latest in a series of recent talks. During the week of Apr. 5, after Microsoft set its three-week deadline for Yahoo to respond to its offer, Microsoft was approached separately by both News Corp.'s (NWS) Rupert Murdoch and Time Warner's (TWX) AOL unit to see if they could get in on the deal, but it appeared that Microsoft was keen to go it alone.
On Apr. 15, top execs from both companies met in Portland, Ore., to discuss two key issues—the social match between the two companies and valuation. At that meeting, Yahoo execs are believed to have said they didn't have a valuation of the company, and said they didn't know who was authorized to make a valuation.
On Apr. 18, there was a call between bankers from both sides. Yahoo's bankers said the company placed a valuation on itself at $40 a share.
On Apr. 29, three days after Microsoft's deadline passed, there were several calls between the top execs at both companies. Yang and Bostock called Ballmer twice. During one of those calls, Yang said that he disavowed the $40-a-share valuation. He asked Ballmer not to go hostile and not to walk away from the deal.
On Apr. 30, they met in California. Yang said the company could be had for $38. That led to the May 3 meeting, where they couldn't close a deal.
It remains unclear whether Microsoft has forever ruled out coming back to Yahoo with another offer. Microsoft's move, coming on the heels of intensified negotiations that pointed to the two companies getting closer on the main sticking point—price—may well be yet another negotiating move.
Yahoo's Stock: Look Out Below
Most analysts have said they think the deal ultimately will be closed because the two companies individually have been unable to slow search giant Google, whose grip on the $25 billion online advertising market has been growing. Together, they could pose a significant foil to Google, especially in online display ads, still a large portion of online advertising.
What's more, during a three-month battle of wills with Yang and his board, Ballmer has made it clear how important Yahoo is to Microsoft's prospects for staying relevant in the Internet era and recapturing lost momentum to hard-charging Google.
Meanwhile, Yahoo has failed to come up with solid alternatives to Microsoft's offer despite making repeated overtures to the likes of News Corp. and Time Warner's AOL, in addition to Google.
Microsoft's offer on Feb. 1 had immediately sent Yahoo's shares soaring to close to $30 a share, just under Microsoft's original $31-a-share offer, which was a 62% premium on Yahoo's stock price at the time. Analysts have said that if Microsoft bowed out, Yahoo's stock would likely sink back close to its price before the offer, about $19 a share, or even lower.
It's possible Microsoft is hoping that as Yahoo's stock sinks and shareholder lawsuits inevitably are filed against the Internet portal for not taking the Microsoft offer, its board will reconsider its recalcitrant position and Microsoft could come back with another offer, perhaps reduced from its original one. The polite tone of Ballmer's letter could indicate it hasn't ruled out a deal eventually.
But it could take weeks for the two sides to sit down again. For now, the Internet's biggest deal yet is dead.