Microsoft walks away from Yahoo deal

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By Richard Waters in San Francisco
Published: May 4 2008 03:05 Last updated: May 4 2008 03:05

Microsoft on Saturday withdrew its takeover offer for Yahoo as the internet company continued to reject the terms of the proposed deal, despite a higher offer worth $33 a share, or $46.5bn.
The apparent abandonment of the three-month takeover tussle came after Yahoo founders Jerry Yang and David Filo flew to Seattle earlier in the day for a last-ditch negotiating session with Steve Ballmer, Microsoft’s chief executive officer, and Kevin Johnson, who oversees its internet operations, according to a person close to the situation.

While the Microsoft executives had raised their cash-and-stock bid from the original $31, and from the $29.39 the offer was worth at the end of last week, the Yahoo representatives on Saturday continued to hold out for at least $37 a share, according to this person.
In a letter addressed to Mr Yang, and released publicly late in the afternoon on the West Coast, Mr Ballmer said he was formally withdrawing the offer, though his letter included at least one hint that he might reconsider if Yahoo bows to Microsoft’s terms. “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,” the Microsoft CEO wrote.

In a statement later on Saturday, Roy Bostock, Yahoo’s chairman, said: ”We remain focused on maximising shareholder value and pursuing strategic opportunities that position Yahoo! for success and leadership in its markets. From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft’s offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view.”

Microsoft’s public abandonment of its offer will add to pressure on the managements of both companies. The drastic move to go public with an unsolicited bid marked an admission by Microsoft that it needed to do something radical to boost its flagging internet operations. Meanwhile, Yahoo executives had worked hard to keep Microsoft from walking away or going hostile in recent days as they tried to persuade it to add to what was already a substantial takeover premium.

The failure of the talks is likely to lead to a sharp drop in Yahoo’s shares, which stood at $19.18 before Microsoft first disclosed its takeover approach on February 1. Some Wall Street analysts have suggested that continued bid speculation would prevent the stock from falling all the way back to this level in the event Microsoft walked away.

Negotiations between the two sides had picked up momentum in recent days as Microsoft indicated it would be willing to raise its offer. Those talks led the software company to hold off from launching an all-out hostile fight for control of Yahoo, something it had threatened to do by last weekend.

In his letter, Mr Ballmer said Microsoft had decided against a hostile bid because “this approach would necessarily involve a protracted proxy contest and eventually an exchange offer.” Microsoft would have had to persuade Yahoo shareholders to throw out the company’s directors at its annual meeting and replace them with Microsoft nominees in order to overturn the internet company’s poison pill defences, but Yahoo could delay such a meeting until at least the middle of July.

Mr Ballmer also accused Mr Yang of anti-takeover tactics that would have reduced Yahoo’s value. “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,” he wrote.
Of “particular concern”, according to Mr Ballmer, was a Yahoo plan to outsource some of its search advertising to Google. He claimed that this would undermine Yahoo’s overall advertising business, since advertisers increasingly wanted to buy search and display advertising in an integrated way, and that it could well be overturned by regulators.

Yahoo did not immediately return calls for comment on Saturday.