Microsoft Walks Away From Yahoo Deal

SAN FRANCISCO (Reuters) - Microsoft Corp walked away from its bid to buy Yahoo Inc on Saturday (May 3,2008), after the Internet company turned down its offer to raise the price by $5 billion to $47.5 billion.

Microsoft's offer was for $33 a share but Yahoo would not lower its demand below $37, Microsoft Chief Executive Steve Ballmer said. The software company initially bid $31 per share for Yahoo more than three months ago.

"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," Ballmer said in a statement.

Analysts say Yahoo has overplayed its hand and they expect the Web pioneer's shares to fall as much as 30 percent to $20 levels when Nasdaq trading resumes on Monday. The stock rose nearly 7 percent to $28.67 on Friday on hopes of an agreement between Microsoft and Yahoo.

"Wow. I'm shocked Yahoo wasn't more reasonable. The stock will probably go down at least $5 on Monday. It is surprising that Ballmer walked away instead of trying a hostile bid at $33," said Walter Price, a senior portfolio manager at RCM fund management company in San Francisco, which had 21 million Microsoft shares and 2 million Yahoo shares as of the end of December.

Laura Martin, a senior analyst at Soleil Securities, said she expected a number of shareholder lawsuits against Yahoo.

"The Yahoo guys want too much money for their company. We think $33 a share is fair in the context of the weakening economic environment and adverse advertising trends," she said. "They've prioritized employees over shareholders in the hopes that someday they can create more than $8 billion of value, even if they have no track record of doing so," she said.

Some Wall Street analysts also have said Microsoft could pull its bid as a negotiating strategy aimed at putting pressure on Yahoo to eventually accept a future offer.

What Happens Now?
At this point, the most likely outcomes seem to be:

1.) A run on Yahoo 's stock. Michael Arrington rightly points out that Yahoo's market cap increased from $26.2 billion to nearly $40 billion, primarily based upon the speculation that Microsoft would pay $31 per share to acquire the company. Those speculators will likely be furious, to put it mildly. Will Yahoo's stock price crater? Most likely, although the first few hours of Monday's trading session will likely tell the tale. Some have suggested that the stock price will crash down to about pre-merger-proposition levels, or about $19. My guess is that it bounces around like crazy and settles at about $22 to $24 -- people still have hope. But boy, are some people going to learn a harsh lesson about sure things.

1a.) Shareholder lawsuits. A no-brainer. Someone will pull the trigger.

2.) Yahoo ties up with Google on some search advertising. On this issue, the Magic 8 Ball seems murkier. Ballmer wanted to buy Yahoo's search team ( the "Panama" project) and if it outsources search to Google, that team may move onto other projects, Henry Blodget argues. Blodget argues persuasively that that's a good thing, as Yahoo can thus focus on areas where it can win. I'm a bit hard-pressed to tell the difference between AOL, (which outsourced its search) MSN, and Yahoo anyway; all three are portals trying to glom onto as much content as they can.

3.) A shareholder revolt, leading to a push to remove Jerry Yang, Yahoo's chief executive. Also a likely outcome. But is there a large enough contingent? On this, I have no idea.

4.) Microsoft's own "scorched earth" bid. Microsoft lets Yahoo's stock price plunge, and then returns to the table with a significantly lower bid. This is an intriguing possibility, but my gut says that when Ballmer walks away, he walks away for good.

If he does so, there are still a couple of favorable outcomes. First, Yahoo's Panama engineers know they have a job waiting for them in Redmond, and Microsoft could simply slowly aggregate the search talent it wants. Microsoft still has fundamental problems with its online strategy, namely the way it vomits content onto its MSN page.

A targeted search engine could also begin to refine that content somewhat, using historical searches and contextual information to present a more relevant page. That would also allow MSN to redesign itself in a cleaner, more Google-like image. (Compare the front page of Yahoo to MSN if you doubt me.)

Here's Forrester's Charlene Li on the subject:

"Microsoft must define and deliver on a strategy that shows how they can "win" now without Yahoo! as a search jump start. (Frankly, we were skeptical that Microsoft could have integrated Yahoo quickly and effectively to realize the full value and vision of the acquisition). Rather than continue to chase Google's dominant search position, Microsoft should redefine the "battle" to one where search is an integrated part of the marketing mix. Microsoft has assets and relationships that GOOG doesn't have: 400 million users relationships through communication tools like Hotmail and Messenger, the aQuantive acquisition, strong display advertising business, and investments/relationships like Facebook. Moreover, AdCenter is well positioned to service advertisers on both the display and search sides, although actual offeringDeal is offs that tie the two together are still in the works. But the thing they don't have today is a strong search user experience, the root of the problem."

Second, I'm of the opinion that Microsoft needed Yahoo far more than Yahoo needed Microsoft, at least from a strategic perspective. But I'm still not convinced that bringing another portal into Microsoft's fold is in the best long-term interests of the company. I've never really found the value in social networking online, versus forging real-life connections (even via email); however, Microsoft might be better off investing in a smaller social-networking firm and start learning how this social stuff works. (Microsoft's research into social networking, SNARF, is tangential.)

Story originally appeard in PC Magazine Online.

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