Ballmer's Letter to Jerry Yang Withdrawing Microsoft's Offer

Following is the verbatim text of the letter from Microsoft's Steve Ballmer to Yahoo's Jerry Yang. The source of this letter is Microsoft.

May 3, 2008

Mr. Jerry Yang
CEO and Chief Yahoo
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Jerry:

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.

Sincerely yours,

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

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Analysis:

As we noted in the previous post there is good reason to believe that Microsoft is still in this to win Yahoo. Ballmer even uses the word "remains the only alternative", suggesting that the offer is still informally on the table. Ballmer somewhat ominously says:

.... 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.

The Yahoo board is likely to have significant concerns already about shareholder lawsuits if the stock tanks following Microsoft's withdrawl, and this statement seems designed to drive that board vs shareholder wedge even further.

Of great concern to Ballmer in the letter are Yahoo's negotiations with Google to have Google take over Yahoo advertising. Ballmer implies that Microsoft was very concerned about the ability to compete with Google using online advertising tools. Yahoo is now refining the adwords-like "Panama" but may diminish that project if Google starts handling Yahoo monetization of advertising. Ballmer also suggests that Yahoo negotiators were using this Google alliance as something of a "poison pill" to kill the deal.

So, has the fat lady sung yet? I think not, and we are in for more fun as the high stakes game for the control of the internet ... continues.

Disclosure: Long on YHOO

Microsoft Walks Away From Yahoo

Microsoft has walked away from the merger talks with Yahoo after the two companies failed to reach agreement on price per share. Microsoft had increased their original offer of $31 per share in cash and stock exchanges to $33 per share (I'm not clear if that $33 took into account Microsoft's lower price since the initial offer or did not factor that in). Most reports said that Yahoo eventually indicated they would sell for $37 per share.

My take on this is that this is a clever strategic move by Ballmer and Microsoft who I think still plan to acquire Yahoo. Yahoo's share price is likely to be hit fairly hard by this development effective at Monday's open, probably sending Yahoo down significantly though it would seem unlikely Yahoo will approach former lows.

The degree of the share price drop will depend on whether the market thinks Microsoft is out or just bluffing, but either way this is likely to create a lot of downward pressure on Yahoo's share price. Microsoft will likely start buying shares on the open market at these reduced prices.

In the next post we'll take a look at today's letter sent by Microsoft CEO Ballmer to Yahoo CEO Yang, which suggests it is lucky for Jerry that Steve didn't have any chairs handy.

CNET Reports
Disclosure: Long on YHOO