Microsoft withdraws its $47.5b bid to acquire Yahoo

Last-ditch higher offer is rejected Cloud is cast over Web giant

By Miguel Helft and Andrew Ross Sorkin, New York Times News Service  |  May 4, 2008

Microsoft said yesterday that it was abandoning its blockbuster bid to acquire Yahoo after it raised its offer by $5 billion but Yahoo rejected it as still too low.

The about-face followed a meeting in Seattle between Microsoft's chief executive, Steven A. Ballmer, and Yahoo's chief and cofounder, Jerry Yang, according to a person familiar with the discussions.

At the meeting, which also included Yahoo's other founder, David Filo, and a Microsoft president who oversees is online unit, Kevin Johnson, Ballmer increased Microsoft's offer to $33 a share, or a total of $47.5 billion, from its initial bid of $29.40 a share. Yang said Yahoo would not accept an offer below $37 a share, this person said.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer," Ballmer said in statement. "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."

A person close to Yahoo said that price was not the only stumbling block. The person said Yahoo was also concerned that the deal could be blocked by regulators, and wanted a higher offer, in part, as a hedge against that risk.

Microsoft's decision to walk away casts a cloud of uncertainty over Yahoo and its shareholders. The breakdown in the talks is likely to send Yahoo's shares plunging, and Yang and his team will have to decide how to placate investors.

The company has been exploring alternatives to a marriage with Microsoft, including a partnership in search advertising with its archrival, Google, which could lift Yahoo's profit and perhaps its stock price. Yahoo has also discussed a possible merger with the AOL unit of Time Warner and the MySpace unit of News Corp.

But both options pose challenges. The Google partnership is likely to attract scrutiny from regulators because of Google's dominance over online search and advertising, while AOL and Yahoo have many overlapping businesses and technologies.

In a statement issued late yesterday Yang said, "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."

Reactions inside Yahoo are likely to be mixed. Several senior executives favored selling to Microsoft and said in recent days that they were hoping to see a deal happen. Yet other executives were high-fiving each other for successfully defeating Microsoft's bid, people close to the company said.

While its stock may fall tomorrow, Yahoo's management was encouraged by discussions with its largest investors in which they urged management to not accept $33 a share, these people said. For Yang, Microsoft's withdrawal is considered a "personal victory," according to one person who spoke with him.

Microsoft said it would continue efforts to build an online business on its own.

"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," Ballmer said in a statement. "While Yahoo! would have accelerated our strategy, I am confident that we can continue to move forward toward our goals."

Microsoft has spent years and billions of dollars trying to build its own online business. Yet it has steadily lost ground to Google in the search business and has failed to gain significant momentum with advertisers.

Microsoft's decision to abandon its pursuit of Yahoo is not necessarily the last chapter in the three-month-old saga. If Yahoo's shares fall significantly, the company will be under intense pressure to act and may choose to resume negotiations.

Earlier this year, under intense shareholder pressure, BEA Systems did just that after Oracle dropped an unsolicited offer it had made for BEA.

"This seems like a very strong but serious negotiating tactic," said Jonathan Miller, the former chairman and chief executive of AOL. "It will be up to Yahoo to come back to the negotiating table."

In a letter to Yang sent yesterday afternoon, Ballmer wrote: "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."

He added, "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 took particular aim at Yahoo's discussions of a partnership with Google, noting that it would "make an acquisition of Yahoo undesirable to us for a number of reasons."

Microsoft's decision to abandon its bid is likely to raise questions among investors about the judgment of both Microsoft and Yahoo.

When Microsoft made its initial bid, valued at $44.6 billion, it said Yahoo was an important part of its strategy to take on Google. Its choice to withdraw, after threatening to force a shareholder vote, may prompt its shareholders to doubt its resolve. At the same time, many Microsoft shareholders who did not want to bid for Yahoo may be relieved and send shares of Microsoft higher tomorrow.

For Yahoo's shareholders, the abandoned deal may create even more uncertainty over the company's management.