Microsoft withdraws proposal to acquire Yahoo

By Giselle Abramovich

May 6, 2008

Steve Ballmer is CEO of Microsoft

Microsoft Corp. has withdrawn its proposal to acquire Yahoo Inc. because of Yahoo’s unwillingness to settle on the terms of a deal.

Steve Ballmer, CEO of Microsoft, wrote a letter to Jerry Yang, CEO of Yahoo, stating that it is now obvious to Microsoft that “a deal is not to be.” This letter came after Microsoft raised its bid by roughly $5 billion in hopes that Yahoo would submit. Still, Yahoo felt Microsoft’s bid was insufficient and  insisted on Microsoft paying another $5 billion or more.

“We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo and the market as a whole,” Mr. Ballmer wrote in the letter. “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.

“Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer,” he 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.”

The merger of the two companies could have resulted in a superpower, but the industry will never truly know what such a deal would have brought about.

Analysts and industry people are torn on whether the deal would have been a positive or a negative move for the companies.

"It's good for Microsoft that it didn't buy Yahoo – now it has to reform itself,” George Colony, CEO and president of Forrester Research, wrote in a blog post discussing this news. “Steve Ballmer unintentionally dodged a bullet today when the Yahoo/Microsoft deal collapsed.

“Yahoo plus Microsoft would have been a disaster – the best and the brightest from Yahoo would have gone to Google, the culture clash would have been destructive, it would have put Microsoft back in the sights of the regulators,” he said. “And Yahoo wouldn't have helped Microsoft with its biggest task at hand – adapting to the emerging executable Internet software model."

Microsoft, of course, didn't feel this way.

The company feels a deal with Yahoo would have strengthened both companies. The deal would have been an obvious effort to better align itself with Google Inc., the current king of the Internet. 

Additionally, Microsoft claims that the deal would have saved a struggling Yahoo.

But is that really so?

Yahoo presented its three-year financial and strategic plan to its stockholders, which claims that the Microsoft proposal substantially undervalues Yahoo. Yahoo said that it has continued to launch new products and has leveraged its scale, technology, people and platforms, which have all boosted its value.

“We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo for success and leadership in its markets,” said Roy Bostock, chairman of Yahoo, in a statement in response to Microsoft.

“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," he said.

“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.”

Microsoft initially proposed the deal because it believed it would provide real value for both its and Yahoo’s shareholders and would have provided consumers, publishers and advertisers with greater innovation and choice in the marketplace. Its decision to offer a 62 percent premium reflected the strength of these convictions.

However, Yahoo stood strong and held to its beliefs that it is not struggling.

The Internet giant has spent the past three years aggressively rolling out offerings targeted at addressing key needs of the mobile ecosystem. Yahoo’s mobile homepage, oneSearch, oneSearch 2.0, oneConnect and onePlace are some examples of Yahoo’s recent mobile initiatives.

“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," Yahoo's Mr. Yang said.