Microsoft is yanking its $33-a-share bid on Yahoo, saying that it will buy out the company "on its own terms."
An excerpt from a New York Times piece pretty much sums up the situation:
Microsoft insists that it would acquire Yahoo only on its own terms. Now it said that it will withdraw its offer, after the Internet giant rebuffed a sweetened $33-a-share bid.
But is Microsoft really going to walk away from the biggest deal of the software giant’s 33-year history?
The company has never denied that it would take a hard line in its negotiations with its target. In fact, Microsoft’s chief executive, Steven A. Ballmer, has regularly talked tough — and may now be adopting perhaps the toughest tactic of all.
The possibility of walking away was always present. Even in February, Christopher P. Liddell, Microsoft’s chief financial officer and an architect of its Yahoo offer, has told The Times that he’s willing to play hardball. 'You have to be disciplined and ruthless,' he said. 'You have to be willing to walk away.'
More recently, Mr. Ballmer reiterated that dropping its bid was a possible strategy.
In recent weeks, many had expected Microsoft to escalate the fight by beginning a proxy fight. Mr. Ballmer has never shied away from brandishing that club, coupled with a tender offer.
But in a recent town hall with Microsoft employees, Mr. Ballmer seemed to suggest that a proxy fight was a relatively unpalatable option. 'There’s a lot of downsides and some upsides associated with that,' he said.
Mr. Ballmer’s letter to Jerry Yang of Yahoo suggests that he didn’t have the appetite for that kind of fight. He acknowledged that the Internet company would fight hard against such a move, and might take steps like linking up with Google.
The letter, to which Microsoft CEO Steve Ballmer alluded, says the following in its entirety:
May 3, 2008
Mr. Jerry Yang
CEO and Chief Yahoo
701 First Avenue
Sunnyvale, CA 94089
After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo!.
I first want to convey my personal thanks to you, your management team, and Yahoo!’s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.
I am disappointed that Yahoo! has not moved towards accepting our offer. I first called you with our offer on January 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62 percent premium at that time reflected the strength of these convictions.
In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.
Also, after giving this week’s conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders. This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.
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.
Accordingly, 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. Instead, I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!.
We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners.
I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table.
But clearly a deal is not to be.
Thank you again for the time we have spent together discussing this.
Steven A. Ballmer
It appears to Yahoo that it got the short end of the stick.
In Microsoft's defense (and I'm not a fan of Microsoft), I think Yahoo should have taken up Microsoft's offer, if for no other reason. On the other hand, perhaps it would have been nice if Google put up a bigger bid for Yahoo and made it more of a better system than Microsoft could have handled.
The corporate world just keeps on getting more interesting as time goes on.