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Throughout Microsoft Talks, Yahoo Appeared Unwilling to Sell

By Peter Whoriskey
Washington Post Staff Writer
Monday, May 5, 2008

In the three months after Microsoft launched its bid for Yahoo, the two sides met repeatedly to negotiate. But Microsoft executives and bankers often sensed that Yahoo chief executive and co-founder Jerry Yang was never interested in reaching a deal.

The clearest indication came on April 15, 10 weeks into the process, during a meeting in Portland, Ore., a neutral site. Yahoo had argued that Microsoft's offer of $31 a share, or $44.6 billion, was too low.

So what price, the Microsoft negotiators asked, did Yahoo want?

"Yahoo said, 'We don't have a price,' " according to a source familiar with the negotiations. "Honestly, I think they just wanted the company to stay independent."

The dealings between the two companies, which ended Saturday with Microsoft withdrawing its bid, were marked by a reluctance by Yahoo reach an accord, according to two sources familiar with the negotiations.

Those sources spoke only on background because of the secrecy surrounding the meetings.

Yang and his team reportedly celebrated Microsoft's decision to walk away from the negotiations on Saturday. But a third source familiar with the negotiations warned against concluding that Yang was adamantly opposed to a deal.

"To say Jerry was out there saying 'Over my dead body' is just wrong," according to that source. "They said no to a bad deal -- that's what happened."

Microsoft's withdrawal is unlikely to end the jockeying in what many observers said will be a long-running battle for dominance in online computing, and particularly in online advertising.

Microsoft's bid for Yahoo marked its most aggressive attempt to catch up to Google, the dominant player in those fields based on its preeminence in search-based advertising.

By walking away from the Yahoo deal, Microsoft can now spend the roughly $50 billion it had allotted for the deal to other means of gaining a foothold in Internet services. Microsoft could pursue the acquisition of other Web companies, for example.

"We have a talented team in place and a compelling plan to grow our business through innovative new services and strategic transactions with other business partners," Ballmer said in a statement on Saturday. "While Yahoo! would have accelerated our strategy, I am confident that we can continue to move forward toward our goals."

Google's dominance in online advertising, and the lack of a strong alternative, led some advertising firms to express disappointment in Microsoft's decision to back away from the deal.

"It's disappointing," Sir Martin Sorrell, chief executive of WPP Group, an advertising conglomerate, said on Sunday. "I think most of our clients wanted to have a better online marketplace. Unfortunately it hasn't come to pass."

The next phase in the competition for Web business will begin with Wall Street today, when investors will be closely watching Yahoo's stock price.

Its share price had risen significantly from $19.18 on the day Microsoft's offer was announced to $28.67 on Friday.

Many expect that without the $31-a-share offer from Microsoft, its stock will fall again.

How far will be a matter of keen personal interest, of course, to Yahoo chief executive Jerry Yang, who had resisted pressure from some investors to make a deal.

During the negotiations, Yang presented shareholders with plans projecting robust revenue growth for Yahoo. He used those projections to argue that Microsoft's bid significantly undervalued the company.

Yahoo also announced that it would begin partnering with Google in search advertising. If consummated, that deal would have devalued Yahoo for Microsoft, and Ballmer cited it as one of the main reasons he opted against launching a hostile takeover bid.

Three days after the Portland meeting, Yahoo proposed a price of $40 share, an enormous premium over Yahoo's previous price.

For Microsoft, "that was a little hard to deal with," a source said.

Then as the negotiations were winding down, there was another indication that Yang and co-founder David Filo may have been simply reluctant to sell the company.

But while the Yahoo board was willing to sell for $37, Yang and Filo wanted to hold out for $38, according to a source familiar with the negotiations. Some major Yahoo shareholders meanwhile have indicated that they would settle for $34.

Microsoft had raised its bid to $33 a share.

Today, the market will weigh in with its decision.

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