Microsoft Withdraws Offer For Yahoo

Microsoft has decided to walk away from its bid for Yahoo (NSDQ: YHOO). Said Microsoft CEO Steve Ballmer in a statement: "We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo! and the market as a whole. Our goal in pursuing a combination with Yahoo! was to provide greater choice and innovation in the marketplace and create real value for our respective stockholders and employees. Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer. After careful consideration, 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 that Microsoft has a strong team and can survive without Yahoo.

According to reports, Microsoft and Yahoo had been stuck at $33 and $37 respectively and from there the two sides wouldn't budge. The withdrawal comes almost exactly three months after Microsoft launched its initial $44.6 billion, $31 per share bid early on February 1. The breakdown happened today in talks in Seattle between Ballmer, Yang, Yahoo's other co-founder, David Filo, and Kevin Johnson of Microsoft, according to the NYTimes. At the meeting, Ballmer increased Microsoft's offer to $33 a share, but Yang said Yahoo would not sell for less than $37.

So what's next? Yahoo's stock will drop hard on Monday, but at least there's nothing stopping them from making that deal with AOL (NYSE: TWX) (or the ad deal with Google) now. And it wouldn't be surprising to see the lawyers come out, trawling for angry shareholders. Microsoft will, in all likelihood, stage a strong relief rally on Monday. Its stock is down over 10 percent since the bid was originally made, although it had recouped most of its losses before sagging after a ho-hum earnings report this quarter.

What won't happen now is a proxy battle, reports CNet. "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," Ballmer said.

There's beensometalk that we could see a reprise of the Oracle-BEA Systems, whereby the deal failed, but then Oracle came back to it at a later point and the two sides reached a deal. However this isn't a perfect analogy, because BEA ended up receiving a bid higher than Oracle's original offer. Hard to see Microsoft coming back with a bid over $33 down the road. Theoretically though, if Yahoo were weak enough, Microsoft could revisit the offer.

A remarkable aspect of all this is that for the longest time, analysts believed it was only a matter of when or at what price, rather than if the deal would happen. And the day it was announced, pretty much everyone said it was "done and done." It wasn't until Microsoft threatened to walk?not an empty threat at all, as it turned out?that most observers started acknowledging that this was a serious possibility.

Release

Staci adds: Yahoo's response is out and there's no sign of a door left ajar. But Yang's statement that "the distraction of Microsoft's unsolicited proposal now behind us" might best be labeled wishful thinking. As Joe wrote above, Yahoo's stock is likely to feel the reverb and shareholders, who would have been ok with $33 after Microsoft's $2-per-share increase, will be heard from as well, although, as Yahoo Chairman Roy Bostock said, some shareholders agreed with the company's view that it was undervalued by Microsoft (NSDQ: MSFT). Meanwhile, distractions aplenty will continue including the speculation over whether Microsoft is really out of the game and the possibilities Yahoo has been exploring as a way to stay independent or at least control its own fate. Hard to see how Yahoo comes out of this without a least an alliance it could have resisted before Microsoft's bid.

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