Microsoft yanks Yahoo bid

Microsoft withdrew its proposal to acquire Yahoo on Saturday, after more than three months of posturing and negotiations and a last-ditch effort to close the deal by raising its offering price.

In a statement released late in the afternoon, Microsoft Chief Executive Steve Ballmer said the company had raised its bid to $33 a share, up $2 a share, but "Yahoo has not moved toward accepting our offer."

"After careful consideration, we believe the economics demanded by Yahoo do not make sense for us," Ballmer's statement continued, "and it is in the best interests of Microsoft stockholders, employees, and other stakeholders to withdraw our proposal."

Yahoo, in a statement, reiterated its board's earlier contention that Microsoft's offer undervalued the company. "This process has underscored our unique and valuable strategic position," CEO Jerry Yang said.

Some observers who saw the acquisition as an expensive way to catch Google in the fast-growing business of online services and advertising welcomed the decision.

"It would have further strengthened Google," said Sid Parakh, an analyst with McAdams Wright Ragen, a Seattle-based stock brokerage. Parakh, who opposed the deal from the start, said the complexity of integrating Yahoo and Microsoft, with their different corporate cultures and technologies, would have been costly and distracting.

On Feb. 1, Microsoft publicly disclosed that it was offering $31 a share for Yahoo in a half-cash, half-stock deal worth $44.6 billion at the time.

Yahoo's board rejected the proposal, saying it "significantly undervalued" the company, once the Internet's leading light. The two sides jockeyed for advantage, in an acquisition dance that dragged on in public statements and leaks to national media.

Weekend talks

The companies were in negotiations on Friday and Saturday, but were still separated by price. Microsoft said it was willing to raise its offer to $33 a share. Some major Yahoo shareholders were reportedly holding out for $35 to $37 a share.

A person familiar with Microsoft's thinking and the negotiations, who spoke on condition of anonymity, said Yahoo executives had been unclear on their asking price and on who was authorized to negotiate.

Yahoo co-founders Yang and David Filo met with Ballmer and Kevin Johnson, president of Microsoft's platforms and services division, in Seattle on Saturday. Yang and Filo said Yahoo's board of directors wanted $37 a share. That was where the last-ditch effort to salvage a deal ended, said the person familiar with the negotiations.

Ballmer formally withdrew the proposal in a letter to Yang sent around 4 p.m. Saturday.

The letter explained his decision to abandon the deal rather than pursue a hostile takeover, which would have involved an offer directly to Yahoo shareholders and a bid to replace the company's board of directors, a possibility that appeared likely a week ago.

"[A]fter 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," Ballmer said. "... 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 cited, in particular, Yahoo's apparent plans to outsource some of its search advertising to Google. The two companies ran a limited test of this arrangement last month, a move that has already drawn antitrust scrutiny.

Ballmer thanked Yang and Yahoo's board for their consideration of the deal, striking a somewhat conciliatory tone.

Parakh, the analyst, noted that the withdrawal of the offer could be a long-term tactic. Yahoo's shares will likely plummet when the stock market opens Monday morning. He estimated they would trade in the low $20 range, but he didn't expect them to go all the way to $19.05, where they were before Microsoft announced its proposal.

Microsoft could then come back with its original $31-a-share offer or some other proposal to grab the company.

Wrote Ballmer, "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."

Multifaceted efforts

In a meeting with Microsoft employees Thursday, Ballmer explained the company's multifaceted efforts to build a business in online services and advertising, which will be worth $80 billion a year by 2010, according to some estimates.

Buying Yahoo and its audience of e-mail and instant-messaging users, as well as its popular Web sites, would have hastened those efforts, though some have suggested those purchases would have antitrust implications of their own.

"Yahoo is not a strategy; it's a part of a strategy," Ballmer told employees, according to the company. "It helps with some of the elements of speed and scale and acceleration in the strategy that we're on."

In his statement Saturday, Ballmer said the company will continue to invest and may make other acquisitions.

"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," he said.

Parakh said analysts who reacted negatively when Microsoft announced plans to invest heavily in online services two years ago would likely give the company more leeway to pour money into the business today — especially now that it's not dropping more than $40 billion on an acquisition.

"Everybody sees the need for Microsoft to get something done on the online side," he said. "They won't be complaining now."

Benjamin J. Romano: 206-464-2149