Microsoft Abandoning Yahoo Acquisition

Microsoft and Yahoo! could not agree on an acquisition price. Microsoft Chief Executive Steve Ballmer and Senior Vice President Kevin Johnson met Yahoo! co-founders Jerry Yang and David Filo in Seattle on Saturday to negotiate. Ballmer raised Microsoft’s offer to $33 a share but Yang, Yahoo!’s chief executive wanted $37. After the meeting, Ballmer sent a letter to Yang stating Microsoft’s withdrawal and adding that “a deal is not to be.”

Microsoft backed out of the merger plan not because it cannot afford the asking price of $37 but because Yahoo’s recent partnership with Google made things more complicated.

Below is the text of the letter from Microsoft CEO Steve Ballmer to Yahoo! CEO Jerry Yang  explains the reason behind the withdrawal:

We regard with particular concern your apparent planning to respond to a “hostile” bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons:

• First, it would fundamentally undermine Yahoo!’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on your display advertising business to fuel future growth.

• Given this, it would impair Yahoo’s ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.

• In addition, it would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.

• This would also effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.

• It could foreclose any chance of a combination with any other search provider that is not already relying on Google’s search services.

But if Yahoo!’s stock tumbles, industry observers say the acquisition door could open again, perhaps later this year. Microsoft will “watch what happens to Yahoo! and wait for Yahoo! to falter,” says Edward Deibert, a director at law firm Howard Rice Nemerovski Canady Falk & Rabkin. “If Yahoo! is unable to deliver, Microsoft could take another stab at a [lower] price.”

Microsoft may make a comeback, then Yahoo to Microsoft’s acquisition is more difficult to resist.