Posted by: Rob Hof on May 3, 2008
Microsoft announced it’s dropping its unsolicited bid to buy Yahoo late Saturday afternoon. (The announcement and Microsoft CEO Steve Ballmer’s letter to Yahoo CEO and cofounder Jerry Yang, as well as Yahoo’s response, are after the jump.)
The surprise move came after a day in which it appeared that 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.
My bet: This isn’t the end of the game. And a number of other people think so too, like Dave McClure, Sarah Lacy, and WatchMojo’s Ashkan Karbasfrooshan. Microsoft has too much at stake in its battle to remain relevant in the Google era, and I can’t believe that after three months of insisting the combo was a good one, it suddenly decides it’s not.
For all the expense and trouble of integrating it with its own operations, some kind of deal with Yahoo may be its only hope of catapulting itself back into contention in the crucial online advertising industry. It may not work, of course. But I think Ballmer believes it can. So I wouldn’t be surprised to see Microsoft return with another offer down the road after things settle down.
In the letter, Ballmer said Microsoft had raised its original offer, which was valued Friday at a little over $29 a share because Microsoft 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 that 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 about Yahoo’s announcement about two weeks ago that it would run a trial for Google ads to run alongside Yahoo search results.
Yahoo had hinted this week that that a deal 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 rejecting it.
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 and 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 Bill Miller, had indicated they wanted around $35 a share.
What’s more, those institutional shareholders, along with Yang and cofounder 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 email and instant-messaging services. Moreover, they were concerned with accepting Microsoft’s stock given that Microsoft’s strategy vs. Google wasn’t bearing fruit either.
Until Saturday, a deal appeared possible, even imminent. On Saturday, Yang and Filo flew up to Seattle to meet with Ballmer and Kevin Johnson. 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.
Today’s were just the latest in a series of recent talks. During the week of April 5, after Microsoft set its three-week deadline for Yahoo to respond to its offer, Microsoft was approached separately by both News Corp.’s Rupert Murdoch and Time Warner’s AOL unit to see if they could get in on the deal, but it appeared that Microsoft was keen to go it alone.
On April 15, top execs from both companies met in Portland 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 April 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 April 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 April 30, they met in California. By one account, Yang said the company could be had for $38, though another source claims the price Yang offered was $37. That led to Saturday’s meeting, where they couldn’t close the deal.
It remains unclear that 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.
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 unit, in addition to Google. And even if it outsources all its search advertising to Google, which could bring in as much as $1 billion annually in cash flow, such a deal would only acknowledge Yahoo’s failure after several years of trying to come up with a credible alternative to Google’s ad system.
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 to 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 position and Microsoft could come back with another offer, perhaps reduced from its original one.
If Yahoo comes under enough pressure from its own shareholders, it’s possible a chastened board will make new overtures to Microsoft. But it also could take weeks, or even months, for any talks to resume. For now, the Internet’s biggest deal yet is dead.
Here's the press release and Ballmer's letter, as well as Yahoo's response:
Microsoft Withdraws Proposal to Acquire Yahoo!
REDMOND, Wash. — May 3, 2008 — Microsoft Corp. (NASDAQ: MSFT) today announced that it has withdrawn its proposal to acquire Yahoo! Inc. (NASDAQ: YHOO).
“We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo! and the market as a whole. Our goal in pursuing a combination with Yahoo! was to provide greater choice and innovation in the marketplace and create real value for our respective stockholders and employees,” said Steve Ballmer, chief executive officer of Microsoft.
“Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer. 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.
“We have a talented team in place and a compelling plan to grow our business through innovative new services and strategic transactions with other business partners. While Yahoo! would have accelerated our strategy, I am confident that we can continue to move forward toward our goals,” Ballmer said.
“We are investing heavily in new tools and Web experiences, we have dramatically improved our search performance and advertiser satisfaction, and we will continue to build our scale through organic growth and partnerships,” said Kevin Johnson, Microsoft president for platforms and services.
Below is the text of the letter from Microsoft CEO Steve Ballmer to Yahoo! CEO Jerry Yang.
May 3, 2008
Mr. Jerry Yang
CEO and Chief Yahoo
701 First Avenue
Sunnyvale, CA 94089
After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo!.
I first want to convey my personal thanks to you, your management team, and Yahoo!’s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.
I am disappointed that Yahoo! has not moved towards accepting our offer. I first called you with our offer on January 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62 percent premium at that time reflected the strength of these convictions.
In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.
Also, after giving this week’s conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders. This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. 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.
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:
· First, it would fundamentally undermine Yahoo!’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on your display advertising business to fuel future growth.
· Given this, it would impair Yahoo’s ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.
· In addition, it would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.
· This would also effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.
· It could 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!.
We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners.
I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table.
But clearly a deal is not to be.
Thank you again for the time we have spent together discussing this.
Steven A. Ballmer
Chief Executive Officer
Here's Yahoo's response:
SUNNYVALE, Calif., May 03, 2008 (BUSINESS WIRE) -- Roy Bostock, Chairman of Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company issued the following statement today in response to Microsoft Corporation's announcement that it has withdrawn its proposal to acquire Yahoo!:
"We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo! for success and leadership in its markets. 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! is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market. Our solid results for the first quarter of 2008 and increased full year 2008 operating cash flow outlook reflect the progress the company is making. Today, Yahoo! has:
-- a refined strategic focus to drive enhanced volume and yield;
-- reorganized to focus its efforts on its most promising products and services;
-- invested in innovations designed to revolutionize display advertising and facilitate closing the competitive gap in search; and
-- enhanced expense and resource management to support improved profitability."
Jerry Yang, co-founder and chief executive officer, Yahoo! Inc. added, "I am incredibly proud of the way our team has come together over the last three months. This process has underscored our unique and valuable strategic position. With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users."