Microsoft Rejects Yahoo's Price Demands, Abandons Bid

By Peter Whoriskey
Washington Post Staff Writer
Sunday, May 4, 2008

After weeks of negotiations and posturing, Microsoft is giving up its efforts to buy Yahoo, saying that the price the Internet firm is demanding is too high and that any hostile takeover battle would cause enough damage to make the union unappealing.

The move ends for now the possibility that the two tech giants could form a credible rival to Internet titan Google, which has a substantial lead in online advertising. It also forces Microsoft, unrivaled in PC software dominance, to find another means of trying to find a foothold in the Internet era.

"Clearly a deal is not to be," Microsoft chief executive Steven Ballmer wrote to Yahoo chief executive Jerry Yang yesterday.

In a statement, Yang said the three months of negotiations had only underscored the financial value of Yahoo, which had suffered from what many analysts considered lackluster performance.

Shares of Yahoo closed Friday at $28.67, almost 50 percent higher than their pre-bid price.

"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 so that we can maximize our potential to the benefit of our shareholders, employees, partners and users," the statement said.

Ballmer crafted the letter that pulled Microsoft out of negotiations after a meeting yesterday with Yang in Seattle, Microsoft officials said.

The talks had begun Jan. 31, when Microsoft offered to buy Yahoo for $44.6 billion, or $31 a share.

Since Microsoft made its offer, the two sides had differed over price but had appeared to be coming closer to a deal.

On April 18, Yahoo indicated it would sell for $40 a share, sources said yesterday.

After Ballmer then indicated that he might walk away from the table, Yang on Tuesday called Ballmer and said, "Please don't go hostile, please don't go away," according to a source familiar with Microsoft's thinking. The source spoke on condition of anonymity because of a lack of authorization to speak about negotiations. Yang then proposed a price of $37 a share.

Ballmer countered with $33 a share, Microsoft said.

When yesterday it appeared that the gap between what Microsoft would pay and Yahoo would accept could not be closed, Ballmer decided to reject the deal.

Analysts have speculated that Microsoft could be planning to walk away, hoping that it would lead to a precipitous drop in Yahoo's stock price -- and that that would provoke Yahoo shareholders to demand that management make a deal at a lower price.

But Microsoft sources emphasized that the price Yahoo was asking was simply too high.

"This is a real walk," said a source familiar with Microsoft's thinking. Ballmer "has been talking about walking for a month."

Microsoft was once feared as a near-monopoly, with unbounded power over personal computing. But the proposed deal tacitly acknowledged that the software giant has struggled to keep up as more and more computing is done online -- so the focus is the Web, not the PC.

With its proposed acquisition of Yahoo, Microsoft was trying to buy its way into a stronger position.

The deal would have given Microsoft access to Yahoo's 137 million monthly visitors. Moreover, while Google is the preeminent leader in online search advertising -- which represents 40 percent of all online advertising, Yahoo commands some expertise in display advertising, a source of online revenue that is expected to grow rapidly.

Another surprising element of Microsoft's move yesterday was Ballmer's decision not to mount a hostile takeover.

According to the letter that Ballmer sent to Yang, Ballmer thought that in the event of a hostile takeover, Yahoo would make defensive moves that would significantly devalue the company.

Most prominently, Ballmer cited Yahoo's tentative plan to allow Google to provide search advertising on queries entered by Yahoo customers. Such a move would only strengthen Google.

"During the course of the personal meetings between the men [Ballmer and Yang], it became obvious that Yahoo was willing to do a great deal of damage to the asset," said the source familiar with Microsoft's thinking.

© 2008 The Washington Post Company