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Microsoft Scraps Yahoo Acquisition Plans

Citing a hefty price tag and other concerns, Microsoft this weekend officially scrapped its plans to acquire Yahoo.

• By David Nagel
• 05/04/2008

In a letter to Yahoo CEO Jerry Yang, Microsoft CEO Steve Ballmer dismissed the possibilities of both a friendly buyout and a hostile takeover, stating he believed that in a hostile takeover situation Yahoo! would take steps to make itself an unattractive acquisition target.

The withdrawal of the proposal to acquire Yahoo! is a drastic shift for Ballmer, who one month ago said Microsoft would take the offer directly to Yahoo's shareholders and propose replacing the company's board of directors if no progress were made in negotiations.

In the letter Microsoft made public this weekend, Ballmer wrote, "...After giving this week's conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders. This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. 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."

As for a friendly buyout, Microsoft said that Yahoo is just asking too much. "In our conversations this week," Ballmer wrote, "we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer."

In response to Microsoft's withdrawal of the offer, Yahoo issued statements from Yang and Roy Bostock, chairman of Yahoo. Both expressed satisfaction that the Microsoft "distraction" can now be put behind them so that the company can focus on its core business.

"I am incredibly proud of the way our team has come together over the last three months," Yang said in the statement. "This process has underscored our unique and valuable strategic position. 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 so that we can maximize our potential to the benefit of our shareholders, employees, partners and users."

Said Bostock: "We remain focused on maximizing 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. Yahoo! is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market. Our solid results for the first quarter of 2008 and increased full year 2008 operating cash flow outlook reflect the progress the company is making."

Microsoft said it continues to believe that its acquisition proposal would have benefited both companies.

"We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo and the market as a whole," Ballmer said in a prepared statement released May 3. "Our goal in pursuing a combination with Yahoo was to provide greater choice and innovation in the marketplace and create real value for our respective stockholders and employees.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer. 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.

"We have a talented team in place and a compelling plan to grow our business through innovative new services and strategic transactions with other business partners. While Yahoo! would have accelerated our strategy, I am confident that we can continue to move forward toward our goals."

According to a statement from Kevin Johnson, Microsoft president for platforms and services, Microsoft will instead focus beefing up its Web tools through "organic growth and partnership" and by continuing to invest heavily in new tools and "Web experiences."