Microsoft drops Yahoo bid

After trying for three months to persuade Yahoo Inc. to accept its takeover offer, Microsoft Corp. today yanked its bid after the companies failed to agree on a price for the Internet pioneer.

"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," Microsoft Chief Executive Steve Ballmer said.

Yahoo declined to comment immediately.

The companies had finally engaged in merger talks this week and appeared closer than ever to a deal Friday, but they still remained billions of dollars apart in their assessment of Yahoo's worth. Ballmer said today that the company had raised its buyout price to $33 a share from the initial $31 offered, which added $5 billion to the deal that was initially worth $44.6 billion.

That would have represented a 70% premium over Yahoo's closing stock price on Jan. 31, the night that Redmond, Wash.-based Microsoft made its unsolicited offer.

But in recent talks Yahoo had insisted on receiving at least $5 billion more than that, or at least $37 a share, which Microsoft was unwilling to pay, Ballmer wrote in a letter to Yahoo Chief Executive Jerry Yang.

Ballmer said he had decided against launching a hostile bid for Sunnyvale, Calif.-based Yahoo, including trying to take control of the company's board and offering the deal directly to shareholders. He said Yahoo had signaled that it would take action that could prolong such a proxy fight and make the company less valuable to Microsoft, including striking a partnership with Google Inc. in which the search giant would deliver ads alongside many of Yahoo's search results.

In addition to a Web search partnership with Google, Yahoo has engaged in serious talks with Time Warner Inc. about absorbing its AOL online division and giving the New York-based media company a roughly 18% stake in the company.

Jeffrey Lindsay, an analyst with Sanford C. Bernstein, said the withdrawal made a deal with Google much more likely and might also improve Yahoo's chances of acquiring AOL.

Although Ballmer said to Yang that "clearly a deal is not to be," the withdrawal doesn't necessarily end all hope that the two companies could unite.

Some analysts have predicted that Microsoft could withdraw its bid as a brass-knuckles bargaining tactic if it failed to reach a deal, in hopes that Yahoo's stock would plunge enough that its management team would become willing to do a deal on Microsoft's terms.

joseph.menn@latimes.com

jessica.guynn@latimes.com