Microsoft walks away from Yahoo

Microsoft Corp. has abandoned its efforts to take over Yahoo Inc., a move that takes the Redmond, Wash. software giant back to square one in its quest to boost its online business to better compete against Google.

“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 Microsoft CEO Steve Ballmer in a statement distributed early Saturday evening.

Microsoft had raised its initial bid by about US$5 billion, or to $33 per share, but that didn’t convince Yahoo to accept the revised offer, as Yahoo wanted $37 per share, Microsoft 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,” said Ballmer.

More in ComputerWorld Canada

Three ways of looking at the Microsoft-Yahoo deal

In response, Yahoo issued a statement reiterating its position that Microsoft’s offer was too low, and saying that many Yahoo shareholders agreed with its position.

“Yahoo is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market,” Roy Bostock, the chairman of Yahoo’s board, said in the statement.

Yahoo CEO Jerry Yang said that “with the distraction of Microsoft’s unsolicited proposal now behind us” Yahoo can continue with “the most important transition in our history.”

All parties with a stake in the deal had been waiting for Microsoft to announce its next move, after Yahoo failed to agree to a deal by last Saturday, the deadline Microsoft had set three weeks earlier.

But Microsoft stayed silent for days, as observers speculated whether it would walk away or prepare a hostile takeover. However, on Friday anonymously sourced reports in The Wall Street Journal and The New York Times said that Microsoft and Yahoo had turned a corner and were for the first time negotiating merger terms in earnest.

Ultimately, it seems that Microsoft’s management, fatigued by Yahoo’s resistance and demands, decided that engaging in a proxy fight to oust Yahoo’s directors would be an arduous and nasty process. After all, for Microsoft, the goal of the massive acquisition was to quickly become a mightier competitor to Google in online advertising.

“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,” Ballmer wrote in a letter he sent Saturday to Yang.

As soon as Microsoft announced its bid for Yahoo on Feb. 1 — valued at US$44.6 billion at the time — Yahoo’s management began seeking and considering alternatives, while its stock began to rise from the latest pre-bid price of $19.18.

By the time Yahoo’s board formally rejected the unsolicited offer on Feb. 11, saying it undervalued the company, Yahoo’s stock price had risen to $29.87, erasing the offer’s premium. The next day, Microsoft hinted in a letter to Yahoo that it wouldn’t shy away from attempting a hostile takeover. Meanwhile, several media reports appeared — all attributed to anonymous sources — that Yang was holding conversations with Google, AOL, Disney and News Corp., exploring alternative deals that would strengthen Yahoo’s business and thus relieve the pressure to accept Microsoft’s offer.

On April 5, Microsoft, clearly impatient, threatened Yahoo’s board of directors with a proxy battle if it wouldn’t agree to a buy-out in the next three weeks. That deadline passed last Saturday.

No alternative deal ever materialized for Yahoo, except for a very limited, albeit eyebrow-raising, test that saw Yahoo run Google ads along with some search engine results on Observers speculated that the test, announced on April 9, could lead to a full-blown outsourcing of Yahoo’s search ad business to Google, a move that financial analysts believe could boost Yahoo’s revenue. Press reports last week indicated that Yahoo and Google might still enter into such a deal.

This possible deal with Google played a big part in Microsoft’s decision to walk away, Ballmer wrote in his letter. If Yahoo outsourced search advertising to Google, the deal would “fundamentally undermine” Yahoo’s long-term viability, he wrote.

“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,” Ballmer wrote.

Moreover, the Google deal would cause key advertising-system engineers to leave Yahoo and would create regulatory and legal problems that Microsoft wouldn’t want to inherit, Ballmer wrote.

Yahoo also made overt maneuvers to buy itself time. For example, on March 5, Yahoo lifted the following week’s deadline for nominating directors to its board, an attempt to discourage Microsoft from launching a proxy fight to replace the current board with members willing to approve its Yahoo acquisition bid.

On March 18, it kicked off a tour to investors by dusting off a three-month-old financial plan to reinforce its contention that Yahoo is worth much more than Microsoft offered to pay for it. The plan, which had originally been presented to Yahoo’s board in December, predicts that Yahoo will double its operating cash flow over the next three years from US$1.9 billion to $3.7 billion. The plan also forecasts that, subtracting the commission that Yahoo pays to sites in its advertising network, Yahoo will generate $8.8 billion in revenue in 2010. Financial analysts agreed the plan is highly optimistic.

Yahoo also got into hyperactive mode with product and strategy announcements after Microsoft’s bid, always pointing out that each initiative proved that it is able to improve its situation as an independent company. For example, it acquired online video player Maven Networks, announced its social network OneConnect mobile service, re-launched its video site and introduced Yahoo Buzz, a social news site that has been very well received.

It also announced AMP, a new advertising management platform that it says will “significantly simplify” buying and selling ads online and that will roll out in phases starting in 2008’s third quarter and continuing into 2009. Yahoo also added video to Flickr and joined Google’s OpenSocial project of common APIs for social networking applications.

It also recently announced its most ambitious plan yet to take advantage of the popularity of social networking. Yahoo Open Strategy (YOS) calls for the company to swing wide open the doors of its Web platforms to let outside developers create applications across its network of sites, starting with its search engine via a beta project called Search Monkey.

Of course, there have been also reminders of why the company found itself an acquisition target. The most concrete of these reminders was on Feb. 12, when Yahoo started laying off about 1,000 staffers. Meanwhile, prominent executives like Bradley Horowitz, vice president of product strategy, voluntarily departed, in Horowitz’s case to arch-rival Google.

As time passed, Microsoft’s hopes of a swift acquisition and integration evaporated. Ballmer maintained all along that the offer was fair and seemed perplexed that Yahoo didn’t jump to accept it. At the prospect of a dragged out proxy fight, to be followed by a complicated and lengthy integration of MSN and Yahoo, Ballmer apparently grew increasingly disenchanted. If Microsoft had $40-plus billion to spend on Yahoo, it can certainly go shopping for the many startup and niche companies that have gained traction in the Web 2.0 space in areas like social networking, social news, video, Web-hosted applications and mobile advertising.

Considering Ballmer’s well-known competitive nature, he will dust himself off and draw up another plan, because one thing is clear: while he is giving up on acquiring Yahoo, he is certainly not giving up on his dream to top Google in online advertising, particularly in search.

“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 in Saturday’s statement.

“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, in the statement.

As of the end of 2007’s third quarter, Google had almost 25 percent of the U.S. Internet advertising market, up from almost 21 percent in 2006’s third quarter, according to IDC. Meanwhile, Yahoo’s share during this period dropped to 11.3 percent from 12.3 percent, while Microsoft’s declined to 5.2 percent from 5.8 percent, according to IDC.

In search usage, Google held a commanding 62.4 percent of queries worldwide, followed by Yahoo in a very distant second place with 12.8 percent, according to comScore. Microsoft ranked fourth with 2.9 percent, after Baidu with 5.2 percent.

In November, Yahoo ranked first in the U.S. in display ad impressions with a 19 percent share, while Microsoft came in third with 6.7 percent, after News Corp.’s Fox Interactive (16.3 percent), according to comScore. Google took seventh place with 1 percent.

Would you recommend this article?


Thanks for taking the time to let us know what you think of this article!
We'd love to hear your opinion about this or any other story you read in our publication.

Jim Love, Chief Content Officer, IT World Canada

Featured Download

Featured Articles

Cybersecurity in 2024: Priorities and challenges for Canadian organizations 

By Derek Manky As predictions for 2024 point to the continued expansion...

Survey shows generative AI is a top priority for Canadian corporate leaders.

Leaders are devoting significant budget to generative AI for 2024 Canadian corporate...

Related Tech News

Tech Jobs

Our experienced team of journalists and bloggers bring you engaging in-depth interviews, videos and content targeted to IT professionals and line-of-business executives.

Tech Companies Hiring Right Now