Microsoft Drops Bid for Yahoo

The sides fail to agree on price. Microsoft says going hostile would take too long and a pending Yahoo-Google deal is an obstacle

by Robert Hof

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.