Posted May 3, 2008 10:04 pm by with 9 comments

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Microsoft announced its plan to withdraw its proposal to acquire Yahoo! today.

This is a strange, and somewhat unexpected turn of events in the ongoing Microhoo saga.

In a letter, Microsoft CEO Steve Ballmer stated:

“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

The reason that Ballmer gave for the withdraw was:

“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.”

This withdraw is so strange due to Microsoft’s well noted desire to put a more acquisition friendly board into play at Yahoo. Reports also came out last week that Microsoft had already begun the process of deciding whether they were going to keep Yahoo employees, and even structured a plan to set aside funs for the compensation of these employees.

And so can begin the conspiracy theories.

One theory is that this withdraw will be a maneuver by Microsoft to drive the price of Yahoo’s stock down, and thus create a situation where the software giant can obtain the company under more friendly terms.

Ballmer stated that the decision for Yahoo to outsource ads displayed for key search terms to Google played a part in them repealing their offer:

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.

To the observer the interesting points here are:

1) That Ballmer lists the reasons why the Yahoo/Google relationship will lessen Yahoo’s value

2) That Ballmer sends a little shot about the relationship perhaps raising ” a host of regulatory and legal problems

No one knows if this is the end of the line for the soap opera that is Microhoo, but it is by far the most intriguing development in the saga. It should be interesting to watch the market on Monday.

  • Long past due withdrawl. I have a gut feeling Microsoft will not try to make some more noise in the industry with someone else now. Perhaps Microsoft will buy Lycos. 🙂

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  • David Snyder

    Yes. They will buy Lycos and reintroduce META keywords to the world. Amazingly innovative Microsoft

  • WHAT! I just read a post (should have looked at the date) about them increasing their bid. If they are looking to devalue the stocks, I think this is the best way to go about it.

  • David Snyder

    I think the one section of the Ballmer letter that is really being glossed over here is his detailed analysis of why the Google/Yahoo ad display partnership is a negative.

    He goes as far as to say, “It could foreclose any chance of a combination with any other search
    provider that is not already relying on Google’s search services.”

    This seems like an attempt to alert the Yahoo investors to Ballmer’s theory that the Google/Yahoo relationship will keep the search company from obtaining a partnership such as the AOL possibility that was proposed by many analysts at the beginning of this drama.

  • ballmer is just sour graping

  • It seems that Steve finally gave up.

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  • It’s good to hear new news flashes on this hot topic of discussion.

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  • What was the value of the finance that Microsoft needed to loan in order to buy Yahoo. I cant remember but I thought it was billions.

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