Yahoo deal falls apart
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.
In addition to a search partnership with Google, Yahoo has engaged in serious talks with Time Warner Inc. about absorbing its AOL online division and giving the New York-based media company a roughly 18% stake in the company. Those talks have slowed, according to people familiar with the matter. People working with Yahoo said a Google partnership is the top priority now.
Jeffrey Lindsay, an analyst with Sanford C. Bernstein, said the withdrawal made a deal with Google much more likely and also might improve Yahoo’s chances of acquiring AOL. It is also possible that Microsoft will make a play for AOL, complicating Yahoo’s strategy considerably.
The person familiar with Microsoft’s thinking said he couldn’t predict how the company would react if Yahoo’s board reversed course and said it would settle for less than $37 a share.
But at least once before in the seesawing talks, Yang had intervened at the last minute to keep negotiations alive.
There was no meaningful dialogue before a letter Microsoft sent to Yahoo on April 5, according to people with knowledge of Microsoft’s version of events who demanded anonymity because the talks were confidential. That missive, which Microsoft made public, gave Yahoo three weeks in which to strike a deal or face a proxy fight.
Those people gave the following chronology:
On April 15, the companies met in Portland, Ore., to discuss how much Yahoo was worth and how difficult it would be to unite the two very different corporate cultures.
When Microsoft asked for a number Yahoo could accept, it didn’t get one. But three days later, Yahoo’s investment bankers gave their equivalents for Microsoft the figure: $40 a share.
Microsoft didn’t take the bait, instead allowing the clock to run toward the April 26 deadline.
On that day, worried that the proxy fight was imminent, Yang and Yahoo Chairman Roy Bostock called Ballmer twice. They said they could live with less than $40 and urged Ballmer to not go hostile or drop the bid.
They also suggested that the two companies negotiate a smaller deal, centered on search engines.
Teams from both companies met in California on April 30 and heard a new number from Yang: $38. Things seemed headed in the right direction.
On Saturday morning in Seattle, Yang and Filo met with Ballmer and showed just how conflicted they were about the entire process. They said their board could accept $37 a share, but added that they personally felt anything under $38 was unfair.
Ballmer offered $33 on the spot, and the parties broke apart to reconsider.
In the afternoon, Ballmer called Yang and told him he’d had enough.
Menn reported from Los Angeles, Guynn from San Francisco.
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The price on Friday of Microsoft’s offer to Yahoo.
The price Microsoft said Saturday it was willing to pay.
The price sought Saturday