News

Yahoo Stock Falls on Failed Microsoft Bid

• By Kurt Mackie
• 05/05/2008

Microsoft's CEO Steve Ballmer cited a dispute over price as the main impediment to a deal in a published letter to Yahoo's CEO Jerry Yang.

Just before the weekend, Microsoft officials had upped the stock portion of the cash-plus-stock bid, offering a $33 per share price for Microsoft's common stock compared with the initial bid of $31 per share. Reportedly, Yang sought a $37 per share price.

In the end, Microsoft decided that the price was too high for its unsolicited bid.

Ballmer's letter, in explaining the failed deal, cited Yahoo's recent moves toward a partnership on Web search ads with Google as a potentially unwanted consequence of starting a proxy war on Yahoo's board. A proxy war to replace board members was what Ballmer had threatened if Yahoo's management failed to come to terms.

The letter also inferred that Yahoo could lose developer and engineering personnel if it partnered with Google on Web search ad technology. Yahoo's talent would become disillusioned as Yahoo stepped away from its commitment to its own Web search ad platform, code-named "Panama," the letter inferred. Panama was rolled out in the first quarter of 2007.

Retaining development talent at Yahoo was a key concern for Microsoft in dropping its bid. The company reportedly planned to set aside $1.5 billion in funds to retain employees after a possible successful takeover of Yahoo. On the other side, Yahoo planned a "poisoned pill" reaction, offering lavish severance pay to employees in the event that Microsoft succeeded in its bid.

Some Yahoo shareholders are currently suing the company over this severance plan, as well as over Yahoo's refusal to sell the company to Microsoft. Microsoft's original bid was offered at the end of January, when Yahoo's stock price was at a low point of about $20 per share.

Yahoo's management consistently said that Microsoft's bid undervalued the company. While some analysts have been predicting that Yahoo's stock will sink to the $20 per share value that existed at the time of Microsoft's bid, it's clear that Microsoft values Yahoo more than that.

The marketplace could decide otherwise on the valuation of Yahoo. In which case, Microsoft could return to bidding on Yahoo should the company's stock price sink lower. One analogy that depicts this strategy is Oracle's acquisition bid for BEA Systems. Oracle withdrew its bid for BEA but then later successfully acquired the company after BEA's valuation took a thrashing on Wall Street.

Ballmer's letter ruled out future plans of "taking our offer directly to your shareholders," adding that Yahoo's management would take steps to make the company "undesirable as an acquisition for Microsoft." The company would pursue "strategic transactions with other business partners," he wrote.

For its part, Yahoo could now proceed with its flirtations with Google, as well as AOL-Time Warner. In April, Yahoo had engaged in testing Google's AdSense for Search platform, causing antitrust warnings to fly from Microsoft's general counsel Brad Smith. (Google hold first place in search engine use, with Yahoo and Microsoft trailing at second and third place, respectively.) Yahoo also reportedly discussed an alliance with AOL during the takeover bid.

In his blog about Yahoo's future plans, Yang simply indicated that Yahoo would "continue to pursue strategic opportunities that position us for long-term success."