The Windows Observer--Microsoft Withdraws Yahoo Bid, Won't Go Hostile

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Volume 6, Number 18 -- May 7, 2008

Microsoft Withdraws Yahoo Bid, Won't Go Hostile

Published: May 7, 2008

by Alex Woodie

Microsoft formally withdrew its bid to acquire Yahoo on Saturday, ending a tense three-month drama on a surprisingly low-key note. Microsoft raised its bid to $33 per share during negotiations between the companies last week, or an increase of about $5 billion. But that wasn't enough for Yahoo's management, which held out for $37 per share, according to Microsoft. And while Microsoft had threatened a hostile takeover, in the end, the company says it didn't seem "sensible" anymore.

In a note to Yahoo's chief executive, Microsoft CEO Steve Ballmer expressed sadness that, despite raising the offer to $33 per share, Yahoo's board still wanted about $5 billion more from Microsoft to get the deal done.

"I am disappointed that Yahoo has not moved towards accepting our offer," Ballmer wrote in the letter, which Microsoft posted to its Web site. "By failing to reach an agreement with us, you and your stockholders have left significant value on the table."

Ballmer also had a few comments about the ad outsourcing partnership Yahoo formed recently with Google. In the letter, he said it would "fundamentally undermine Yahoo's own strategy and long-term viability," "impair Yahoo's ability to retain the talented engineers working on advertising systems," "raise a host of regulatory and legal problems," and "effectively enable Google to set the prices for key search terms."

But in the end, it came down to a difference over money.

After saying repeatedly that it wouldn't raise its offer--in fact, Microsoft threatened to lower its bid if Yahoo didn't get with the program--the software giant eventually sweetened the pot by roughly $5 billion.

It's important to note, however, that the latest offer wasn't $5 billion more than the value of its initial bid. Because the initial offer of $31 per share, or $44.6 billion, was a mix of Microsoft stock and cash, and Microsoft's stock had since declined in value, the actual value of Microsoft's initial bid had dropped to about $41 billion as of last Friday. Adding $5 billion to the offer brought the deal's value to about $46 billion, or about $1.5 billion more than the value of the initial bid. (Got that?)

But that wasn't enough for Yahoo CEO Jerry Yang, who held out for another $5 billion, or about $37 per share, which would have valued the company at around $51 billion, and which ultimately wasn't to be.

The move could come back to haunt Yang and Yahoo.

"I'm extremely disappointed in Jerry Yang," The Wall Street Journal quoted Gordon Crawford, a portfolio manager at Capital Research Global Investors--Yahoo's largest shareholder--as saying. "I think he overplayed a weak hand."

Immediately on Monday morning, Yahoo's stock fell almost 15 percent to about $24.50. That's still about 25 percent higher than the stock was trading before Microsoft announced its surprise bid on February 1. Just the same, Yahoo now faces tremendous pressure to justify the high value it placed on itself, and to prove that it did the right thing by rejecting Microsoft's offer of $33 per share.

Several shareholder groups have already filed lawsuits against Yahoo, alleging that the company acted in bad faith by rejecting the initial offer. Saturday's announcement could open the door to more lawsuits.

Meanwhile, Ballmer is also on the hot seat to prove that Microsoft can compete with Google in Internet services sans Yahoo. Its Online Services division has been a perennial money loser for the software giant, which continues to rely on its Windows operating system and Office productivity software to drive revenues and profits. Microsoft brought in about $51 billion in revenues last year, and has about $26 billion in ready cash.

Some analysts are speculating that, in ending its bid now under these conditions, Microsoft is leaving the door open to come back later and acquire Yahoo at a significant discount, especially if Wall Street does not react favorably to Yahoo's progress (or lack thereof).

In any event, the Micro-Hoo saga appears dead--for now.