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Yahoo deal falls apart

Microsoft walks away from the takeover talks, unable to close a multibillion-dollar gap in price expectations.

May 04, 2008|Joseph Menn and Jessica Guynn | Times Staff Writers
(Justin Lane / EPA )

SAN FRANCISCO — Microsoft Corp. on Saturday yanked a $42-billion takeover offer for Yahoo Inc. that would have reordered the landscape of the Web after the companies failed to agree on how much the Internet pioneer was worth.

The breakdown, which came shortly after their chief executives met in Seattle, marked a dramatic reversal of mood from just a day earlier. The companies had finally engaged in talks about the 3-month-old offer and, after Microsoft said it would add billions of dollars more to the deal, appeared closer than ever to combining two giants of online services and advertising.

"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," Chief Executive Steve Ballmer said in a statement.

The Redmond, Wash., software behemoth's executives said they remained determined to make the company a major force in Web advertising through internal development and other alliances or acquisitions.

Microsoft, which makes the Windows operating system and Office productivity programs, has pursued Yahoo for more than a year as its costly efforts to catch up to Google Inc. in the booming market for Web advertising have withered.

But despite a widening gap in that race between Google and perennial runner-up Yahoo, Yahoo's founders said they wanted to soldier on as an independent company.

They do plan to seek help. The Sunnyvale, Calif., company plans to pursue an advertising partnership with Google, according to people familiar with the talks.

Although antitrust regulators expressed concerns, Yahoo and Google were buoyed by the results of a two-week test in which Google placed its search-related ads, which are the industry's most profitable, alongside some of Yahoo's Web search results.

Google representatives could not be reached for comment. In a statement issued Saturday night, Yahoo showed no regret about not joining Microsoft.

"This process has underscored our unique and valuable strategic position," said Jerry Yang, Yahoo's chief executive and co-founder. "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."

The withdrawal didn't end all possibility that the two companies could unite. Analysts said Microsoft might be hoping that Yahoo's stock tanks enough that its management team comes back to the bargaining table willing to sell for less.

Most analysts predicted a sharp drop in Yahoo's share price, which had risen 7% to $28.67 Friday in expectation of a Microsoft deal, as well as a flurry of shareholder lawsuits accusing management of not looking out for investors' best interests.

"Clearly the stock will drop meaningfully on Monday, because as a stand-alone company it continues to struggle to grow profits and market share," said Stanford Group analyst Clayton Moran. "This deal was a very attractive offer."

Microsoft's team said its reasons for walking away included differences over strategy and culture. But it was clear that the final straw was a dispute over Yahoo's worth that amounted to billions of dollars.

Ballmer said Saturday that the company would be willing to raise its buyout price to $33 a share from the initial $31 offered. The cash-and stock deal initially was worth $44.6 billion when announced Feb. 1, but its value had fallen to $42 billion as Microsoft's share price dropped. The higher offer would have brought the total value to about $47 billion.

A $33-a-share offer would have represented a more than 70% premium over Yahoo's closing stock price on the night that Microsoft made its unsolicited offer.

But 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 Yang.

"This was Jerry and David not being realistic about the company they founded," said a person familiar with Microsoft's thinking, referring to Yang and his Yahoo co-founder, David Filo. "Yahoo's business continues to deteriorate, which is why 'fast' was so important. There was no 'fast.' "

Ballmer said he had decided against launching a hostile bid for Yahoo by nominating a slate for the company's board of directors. 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 the Google partnership.

People close to Yahoo, speaking on condition of anonymity because they were not authorized to discuss the negotiations, said the company's leaders had worried about other issues in addition to price. They said Microsoft had never described a clear plan for beating Google, nor would it discuss how to tackle antitrust concerns raised by combining two major providers of such online services as Web e-mail and instant messaging.

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