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Microsoft Withdraws Yahoo Offer; Yahoo Responds

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Microhoo bid raised aloft; Google-Yahoo Kool-Aid quaffed. "No Mas" cried Ballmer's Microsoft.

Yahoo drank the Google paid search Kool-Aid to fight off Microsoft, leading the Redmond giant to retract its higher bid to acquire the Sunnyvale search engine. Microsoft reportedly offered $33 a share, and Yahoo held fast at $37 a share. That was too rich for Steve Ballmer's blood. The prospect of Yahoo outsourcing its paid search to Google was also too much for Ballmer to stomach.

So Microsoft walked. In a letter to Jerry Yang (full text below), Steve Ballmer cited Yahoo's intention to outsource search as the primary reason he decided to scotch the deal.

Of course that doesn't mean enraged Yahoo! shareholders won't sue Yahoo.

Ballmer wrote, "I hereby formally withdraw Microsoft's proposal to acquire Yahoo!."

Here's why, according to Microsoft's business logic:

Advertisers would use Google rather than Yahoo! Panama to manage paid search, fragmenting not only PPC but display advertising and the Yahoo! advertising ecosystem.
Yahoo then wouldn't be able to retain talented engineers working on advertising systems - engineers whom Ballmer considers a key aspect of Yahoo's attractiveness.

The decision would also create a morass of regulatory and legal problems that no acquirer - especially Microsoft - would want to slog through. Ballmer believes search market share of the combined Yahooo-Google deal would reduce competition and advertiser choice.

Ballmer took the argument one step further, stating the deal would "effectively enable Google to set the prices for key search terms on both their and (Yahoo!) search platforms and, in the process, raise prices charged to advertisers on Yahoo.

While it would be hard to prove a keyword-auction would enable Google or any search engine to "set prices," the deal would increase keyword prices based on Google's ability to monetize inventory more efficiently.

Yahoo responded by promising (again) to maximize shareholder value and pursue strategic opportunities. Yahoo still maintains Microsoft undervalued the company.

Yahoo! banged the drum (again) about:

"-- a refined strategic focus to drive enhanced volume and yield;

-- reorganized to focus its efforts on its most promising products and services;

-- invested in innovations designed to revolutionize display advertising and facilitate closing the competitive gap in search; and

-- enhanced expense and resource management to support improved profitability."

As Jerry Seinfeld might have said, "Yadda, Yadda, Yadda, Yahoo."

Be prepared Monday for Yahoo shares to plummet back to earth. (Full text of Steve Ballmer's statement after the jump.)

Below is the text of the letter from Microsoft CEO Steve Ballmer to Yahoo! CEO Jerry Yang.

May 3, 2008

Mr. Jerry Yang
CEO and Chief Yahoo
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Jerry:
After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo!.

I first want to convey my personal thanks to you, your management team, and Yahoo!'s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.

I am disappointed that Yahoo! has not moved towards accepting our offer. I first called you with our offer on January 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62 percent premium at that time reflected the strength of these convictions.

In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.

Also, after 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. 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.

We regard with particular concern your apparent planning to respond to a "hostile" bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons:

-- First, it would fundamentally undermine Yahoo!'s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. 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.

-- Given this, it would impair Yahoo's ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.

-- In addition, it would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.

-- This would also effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.

-- It could foreclose any chance of a combination with any other search provider that is not already relying on Google's search services.

Accordingly, your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft's proposal to acquire Yahoo!.

We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners.

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.

Thank you again for the time we have spent together discussing this.

Sincerely yours,
/s/ Steven A. Ballmer

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation<


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