Microsoft Ends Pursuit of Yahoo, Reassesses Its Online Options
Software Maker Cites Divide Over Price; The Google Factor
Yahoo Inc. Chief Executive Jerry Yang didn't really want Microsoft Corp. to buy his company. By Saturday, Microsoft Chief CEO Steve Ballmer didn't want that either, leaving both technology companies facing fundamental questions about their futures.
The failed courtship leaves Microsoft with limited options for achieving its strategic goal of expanding its presence online and may not close the door to another bid for Yahoo down the road.
In a letter to Mr. Yang Saturday in which he withdrew Microsoft's takeover offer, Mr. Ballmer cited a divide over price, saying Microsoft had been willing to raise its offer for Yahoo to $33 a share, or about $47.5 billion, and Yahoo demanded at least $4 a share more.
But some people close to the matter believe that the two sides could have found a middle ground if negotiations continued, particularly since some of Yahoo's major shareholders had signaled late last week they would support a takeover by Microsoft at a price in the range of $34 or $35 a share.
Microsoft's battle for Yahoo represented part of the scramble by technology and media giants to capture the flood of advertising dollars moving online and to block Web giant Google Inc. from extending its dominance in online-search advertising.
Mr. Ballmer had said in recent days that he was confident Microsoft could go it alone to build a competitive online-advertising business without buying Yahoo. At the same time, he had faced skepticism from within Microsoft about its ability to pull off such a large acquisition at a time when the software maker faces many other challenges. Mr. Ballmer himself had shown hints of such doubts in recent weeks, say people familiar with the matter.
He also squared off against a Yahoo that was increasingly confident that it was worth much more than Microsoft had been offering. While Mr. Yang and Yahoo directors preferred from the start that the Internet company stay independent, they were particularly emboldened by the success of a test late last month to carry search advertising from Google. "There was just nothing that showed any sign of this potentially coming on track," said one person familiar with Microsoft's thinking, who questioned Yahoo's stated willingness to sell the company to Microsoft at the right price, as it had said publicly.
Having averted a sale to Microsoft, Mr. Yang probably will have to placate shareholders who had been hoping for a deal. Analysts estimate Yahoo shares will fall to between $20 and $25 a share without Microsoft's bid to prop them up, down from their 4 p.m. close of $28.67 Friday in Nasdaq StockMarket trading.
Yahoo is hoping to seal a broader search-ad pact with Google in the coming days, but antitrust experts warn that will surely encounter intense regulatory scrutiny. And the company, which has struggled to focus and execute its plans in recent years, faces deep skepticism from investors about the financial targets it has released for 2009 and 2010 to justify its value on its own.
Microsoft's withdrawal diminishes prospects that Google will face a dramatically bulked up competitor in Web search and online advertising anytime soon. Google's runaway success at the expense of Yahoo and Microsoft in recent years was one major driver of Mr. Ballmer's effort to close a deal. Now, Google is likely to handle at least some of Yahoo's search-advertising business, and Microsoft is heading back to the drawing board to consider its own options. "It's disappointing because one would hope there would be a more balanced marketplace," said Sir Martin Sorrell, chief executive of advertising company WPP Group PLC. "Google's dominance continues."
Microsoft could still eventually end up buying Yahoo. If Yahoo's share price plummets, shareholders could intensify efforts to pressure Yahoo's board to agree to a deal at a lower price. Already several shareholders have sued the company over its rejection of the Microsoft bid.
Mr. Ballmer's letter Saturday appeared intentionally crafted to spell out to Yahoo shareholders how hard Microsoft worked - and the amount it boosted its bid-to entice Yahoo's board to enter a deal. That is a typical tactic for a would-be acquirer hoping to spur shareholder activism and one followed by Oracle Corp. last year in its bid for BEA Systems Inc. After BEA rejected Oracle's offer, Oracle withdrew its bid and its executives took great pains to spell out the effort they made to persuade BEA to enter a deal. Shareholder pressure early this year forced BEA into Oracle's arms.
The takeover standoff that began with Microsoft's unsolicited $31-a-share offer for Yahoo on Jan. 31 finally came to a head Saturday morning in a meeting between Mr. Ballmer, Microsoft Platforms and Services Division President Kevin Johnson, Mr. Yang and Yahoo co-founder David Filo at the airport in Seattle, say people familiar with the matter.
Messrs. Yang and Filo said that Yahoo directors were open to a deal at $37 11 share, and that the two founders would accept that sum as well, despite their personal desire for $38 a share, these people say. "They were saying, this is as low as we can go. There was no indication they were coming off that number," a person close to Microsoft said.
In Seattle, the two sides discussed price and strategy for several hours and Messrs. Yang and Filo returned to California expecting Microsoft might counter with another offer, according to one of the people familiar with the matter.
In a subsequent telephone conversation with Mr. Ballmer, the Microsoft CEO told Mr. Yang that Microsoft was ending its pursuit of Yahoo. Mr. Ballmer sent his letter to Mr. Yang around 4 p.m. Pacific time Saturday officially withdrawing Microsoft's offer. After hearing Messr.s. Yang and Filo's position on Saturday, Microsoft concluded that the Yahoo founders didn't really want to do a deal, according to people close to the. software maker.
People close to Yahoo dispute the assertion that the Internet company wasn't prepared to continue negotiating on price. Yahoo believed that its shareholders weren't prepared to accept a deal in the price range Microsoft was offering, people close the company say.
Though Microsoft never let go of the threat of a hostile deal, Mr. Ballmer ultimately determined that such a course would have been too destructive. Even if it ultimately won shareholder support for a hostile bid, Microsoft would likely have run into trouble with regulators, its advisers warned.
"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer," Mr. Ballmer said in a Microsoft news release. "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," he added.
Yahoo Chairman Roy Bostock responded in a press release, by saying, "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."
One person familiar with the matter said that the $37 a share Mr. Yang cited to Mr. Ballmer was based on the company's calculation of its value-particularly in light of alternatives such as a Google ad deal-and not what its large shareholders were demanding. Major Yahoo shareholders had signaled by late last week that they were open to a deal around $34 or $35 per share and were optimistic that the price gap with Microsoft could be bridged, according to people familiar with the matter.
Some people close to the situation believe Microsoft would likely have won a hostile takeover battle at $33 per share. But Mr. Ballmer in his Saturday letter to Mr. Yang cited that potential Google deal as a reason that Microsoft decided not to go hostile. "Your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path," he wrote.
Mr. Ballmer said this was because such a deal would undermine Yahoo's online advertising sales strategy and pose regulatory and legal problems Microsoft wouldn't want to inherit.
A person familiar with Microsoft's thinking said that enhanced employee severance benefits Yahoo instituted in February in case of a change of control represented a cost that Microsoft was also reluctant to bear. Other concerns within Microsoft may have also influenced Mr. Ballmer's thinking. The Yahoo bid was driven by a small group of executives from Microsoft's online group. That group had planned for the bid process to play out fairly quickly with Yahoo entering a friendly deal.
But as time dragged on, other Microsoft executives, including some in the group over seeing Office software, ex pressed their opposition to th deal, say people familiar wit the situation. Also, concern within the company grew over the challenge of integrating Yahoo's roughly 14,000 staff an various online services, the say. Whether these concerns affected Mr. Ballmer is hard to tell but people close to mm say he started to raise more question about the deal to his lieutenants.
Internal confusion over Mr. Ballmer's plans was rife in March at a three-day meeting of Microsoft's 150 top executives in upstate Washington. Despite exhaustive presentations on the future plans of each Microsoft business group, Yahoo was hardly mentioned. Only on the last day
did Mr. Ballmer mention the bid, in response to a question. He said few words on the topic, leading some executives to believe was distancing himself from the deal.
As a result, Microsoft executives were surprised when Mr. Ballmer on April 5 sent a letter to Yahoo directors threatening a hostile approach if they didn't reach a friendly deal by April 26. That spurred Yahoo executives and an entourage of ankers and advisers from both sides to meet with Microsoft on April 15 at a Portland, Ore., law firm for what one attendee described as an "information-sharing session about operational issues, strategy and other issues." presentation from Yahoo included a slide that said Microsoft's offer "significantly undervalues" Yahoo.
Late into the meeting Mr. Ballmer addressed the elephant in the room: "Where are we on price?" he asked Mr. Yang, according to two people who were present. Responding to Mr. Ballmer's question, Mr. Yang repeated that the original offer of $31 a share "substantially" undervalued the Internet company. Mr. Ballmer again asked for a firm price, and Mr. Yang said he didn't have a number.
After flying back to New York on the redeye from Portland, Microsoft's advisers call with their counterparts at Yahoo to address the price issue.
During the April 18 call, Goldman Sachs banker Gene Sykes, one of Yahoo's lead bankers, said that at $40 a share the Internet company would be open to a friendly deal. Yahoo's advisers added that below that threshold there would be likely be a lot of debate among Yahoo directors, stressing that the board wasn't specifically asking for $40 at that point, say people familiar with the matter.
Microsoft and its advisers believed that by asking Yahoo for a price they were sending a clear signal that they were willing to pay more than the original bid of $31 a share. But they viewed an asking price of $40 a share as an unrealistic starting point.
For more than a week afterward, there was silence between the two camps. On Saturday, the deadline Mr. Ballmer had set came and went without any movement.
On the following Tuesday, April 29, Mr. Yang called Mr. Ballmer and told him Yahoo might be open to a deal below $40. He described $40 as the "bankers' view," not the board's, according to two people close to Microsoft. Yahoo Chairman Roy Bostock also called Mr. Ballmer and, along with Mr. Yang, urged the Microsoft 'CEO to sit down with Yahoo to kick-start discussions.
On Wednesday, Mr. Ballmer arid Mr. Yang met at Yahoo's law firm in Palo Alto, Calif., the people familiar with the matter say. At the meeting Mr. Yang signaled that Yahoo could accept less than $40 a share.
People close to Yahoo said that Microsoft indicated at Wednesday's meeting it could raise its bid per share a "couple" or a "few" dollars. But Yahoo learned that Microsoft was willing to make a specific offer of $33 a share only in Mr. Ballmer's letter to Mr. Yang Saturday these people said. "We did not know what the offer was," said one person close to Yahoo.
People close to Microsoft say they had made it very clear to Yahoo by the end of last week that they were prepared to offer $33, and that at that price the software maker was "near the end of the rope." On Friday, Microsoft general counsel Brad Smith called Ron Olson, a lawyer for Yahoo's board, and told him Microsoft was prepared to pay $33, according to people familiar with the matter.
During their talks last week, Microsoft and Yahoo at least briefly discussed the possibility of Microsoft's buying just Yahoo's Web-search business alone, say people familiar with the matter, though they never reached an agreement on that either .. One person involved in the negotiations described the search-business talks as a "sideshow."
While Microsoft could eventually pursue Yahoo again, people close to the two sides said they didn't believe Saturday's withdrawal was a negotiating tactic designed to pressure Yahoo to accept a lower offer. Yahoo will now likely face pressure from its investors to justify why it couldn't reach a deal in the range of $33.
In addition to the Google negotiations, Yahoo has also been in discussions to merge with Time Warner Inc.'s AOL Internet unit, under an arrangement in which Time Warner would hold a roughly 20% stake in Yahoo, people familiar with the matter said. But Microsoft's withdrawal of its Yahoo bid could shake the AOL discussions off course. It is possible, for example, that Microsoft will become a suitor for AOL, say people familiar with the matter.
Microsoft's next course of action, say people familiar with the company, will likely be to try to form a tie-up with another Internet company that could pull more consumers and advertisers to its Internet services such as Web search.
In an interview on Thursday Mr. Ballmer noted that few Internet companies have the size that Microsoft would need to immediately get a boost to its business and market share in Internet advertising. Among them, he listed Facebook Inc., AOL and MySpace, the social-networking service owned by News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.
By: Kevin Delaney, Matthew Karnitschnig, & Robert Guth
Wall Street Journal; May 5, 2008
