Yahoo walks away from Microsoft negotiations

Yahoo Inc. said Thursday it is no longer talking to Microsoft Corp. about a merger because the Redmond, Wash.-based software giant was only interested in purchasing part of the company.

But the Wall Street Journal reported Yahoo is nearing an agreement with Google involving its search advertising business.

For its part, Yahoo made no mention of such a deal in a statement it issued late Thursday afternoon. Such deals are typically announced either before U.S. financial markets open in the morning or after they close at 4 p.m. Eastern time.

On Feb. 1 Microsoft offered to purchase all shares of Yahoo but Yahoo rejected this bid, valued at US$44.6 billion at the time, as too low. This set about several weeks of negotiations between the companies. After Microsoft ended its acquisition bid for Yahoo on May 3, the companies acknowledged that they were in talks for an unspecified deal that most observers assumed involved Yahoo’s search-advertising business.

Microsoft on Thursday confirmed that it was not interested in rebidding for all of Yahoo, but had been seeking an “alternative transaction” that it believed would bring Yahoo shareholders more than US$33 per share, which the value of Microsoft’s previous final bid for all of Yahoo.

With respect to this, Yahoo’s board decided “that such a transaction would not be consistent with the company’s view of the converging search and display marketplaces, would leave the company without an independent search business that it views as critical to its strategic future and would not be in the best interests of Yahoo stockholders,” the company said in a statement.

In April, Yahoo announced that it would test running Google ads along with its search results. Afterward, the companies said the test had gone well, but declined to provide more details on whether they would seek a longer-term, more formal, search ad deal.

Microsoft and Yahoo failed to come to terms on either a full or partial acquisition after months of on-again, off-again negotiations. Yahoo now faces the possibility of its board members being voted out by shareholders in a proxy battle spurred by billionaire investor Carl Icahn.

Icahn and Yahoo Chairman Roy Bostock have been trading barbs in public letters back and forth for the past week and a half as Icahn increased public criticism of how Yahoo has mishandled its dealings with Microsoft. On Friday he told Yahoo’s board to offer itself up for sale to the software giant for $49.5 billion and be done with it. Icahn also said he would seek to replace Yahoo CEO Jerry Yang if his proxy bid is successful.

In response, Yahoo’s board has defended its actions of the past several months. Through this public disagreement between Icahn and Yahoo, Microsoft has remained noticeably silent, so it was never clear if the company was still interested in purchasing Yahoo for that price or any other.

Thursday’s news likely will inspire more ire from Icahn, though it’s not clear what he would do with Yahoo if he is successful in ousting its board but cannot find another company to purchase Yahoo.

On May 15, Icahn sent a letter to Yahoo’s board announcing he is nominating 10 candidates to replace all incumbent directors at the company’s shareholders meeting in July. A few days later Microsoft and Yahoo said publicly that they were both open to negotiating another deal, although not one for Microsoft to totally purchase Yahoo but instead to buy only pieces of the company.

Icahn’s move and the possible shake up of Yahoo’s board may have led one director, Edward Kozel, to resign on May 22. His resignation prompted Yahoo to push its shareholder meeting back to August and to operate with only nine directors until then.

Icahn’s actions came after Microsoft and Yahoo failed to come to an agreement after two months of haggling on a price.

During that time, Yahoo did everything it could to avoid an acquisition by Microsoft, seeking other suitors and striking the deal with Google to test Google’s AdSense for Search service as one of the Web publishers that carry pay-per-click text ads from Google.

Yahoo also attempted to buy time when Microsoft threatened to mount a proxy battle for the company, which it implied it would do first in a letter to the company on Feb. 12 and later in harsher terms in a letter to Yahoo’s board on April 5.

For example, on March 5, Yahoo lifted the following week’s deadline for nominating directors to its board, an attempt to discourage Microsoft from trying to replace the current board with members willing to approve its Yahoo acquisition bid.

Yahoo also unveiled a flurry of product and strategy announcements in the months following Microsoft’s bid, pointing out that each initiative proved it could continue go it alone as an independent company.

Microsoft eventually pushed the price it was willing to pay for Yahoo up about $5 billion, or to $33 per share, but Yahoo still wasn’t happy with the price. Yahoo executives later claimed it was Microsoft that ultimately walked away from the deal the first time.

In the days that followed before Icahn mounted his proxy battle, Microsoft distanced itself from Yahoo and executives said the company was moving on. Yahoo executives, meanwhile, seemed to backpedal when it became clear board members and investors weren’t happy with the deal falling through, and said they would be open to being acquired for the right price if Microsoft or another suitor came calling.

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