Microsoft Walks Away From Yahoo Acquisition

Redmond (WA) - Microsoft has pulled the emergency brake and decided that it will not pursue a purchase of Yahoo. In a letter sent to Yahoo co-founder and CEO Jerry, Microsoft CEO said that Yahoo’s demands of a 70% premium of the company’s closing price on January 31 were unreasonable and he made it clear that Yahoo’s decision to strike a deal with Google’s advertising solutions were the decisive blow to kill the deal altogether. We are now waiting Yahoo stockholders suing the company and Google continuing its current pace of growth.

In the end, Yahoo may have gambled away its opportunity to merge with Microsoft and one promising opportunity to take one Google’s dominance in search advertising. According to Ballmer, Microsoft was willing to raise its bid "by roughly $5 billion" to $33 per share, but Yahoo demanded another $5 billion or a per-share price of about $37. "Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer," Ballmer wrote in the letter to Yang.

"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," said Ballmer. The executive also said that he would not pursue a proxy contest against Yahoo.

In particular, Ballmer criticized Yahoo’s intent to collaborate with Google and its advertising solutions, a move that was widely considered to be put in place to upset 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," Ballmer wrote.

Microsoft believes that such a decision would "fundamentally undermine Yahoo’s own strategy", "impair" the company’s ability to retain key talent, create a "host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit", "enable Google to set the prices for key search terms", and "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," Ballmer concluded.

Going forward Ballmer said that Microsoft will rely on growing and building its own business and "strategic" partners. He also noted that he believes that Microsoft’s offer represented a "fair" offer and by not accepting it, Yahoo and its stockholders "have left significant value on the table."

While Microsoft may be considered the loser in this acquisition battle, the winner clearly is not Yahoo. Yahoo has been losing search share for at least two years to Google and has shown no signs that it can reverse that trend. According to Nielsen Netratings, Google held a 58.7% share in March of this year, up from 53.7% in March 2007 and 49.0% in March 2006. Yahoo is currently estimated to hold an 18.1% share, down from 21.8% last year and down from 22.0% in 2006. Microsoft’s MSN/Live Search is listed with a 12.0% share, up from 10.1% in 2007.

It remains to be seen if Yahoo can survive by being squeezed by two giants and whether Microsoft will find ways to accelerate its growth to eventually surpass Yahoo and catch up with Google. Yahoo itself is likely to need a strong partner to survive this battle and there clearly aren’t many companies that could afford to purchase the company and live with the corporate culture of the company.

The clear winner appears to be Google. It will take time until significant change in the search and Internet advertising market can be expected. At least for now, Google can continue to build and expand its search advertising business without having to expand much headwind from either Microsoft or Yahoo - or anyone else. For the sake of competition, that may not be the best outcome for the industry, web publications and the consumer.