Microsoft pulls out of Yahoo deal

TOPH TUCKER '08

Last night, Microsoft CEO Steve Ballmer wrote in a letter to Yahoo! CEO Jerry Yang that Microsoft had decided to abandon its three-month bid for the faltering Internet giant. He wrote, “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.” This comes as a surprise to many who had been expecting either a done deal, or an announcement by Microsoft that it would go hostile.

Early reaction online has been that by rejecting Microsoft’s offer, Yahoo! is putting the nail in its own coffin. One blogger titled his post “Ballmer to Yang: Dear Jerry, Drop Dead.” Another called the move “Yahoo’s Hari-Kari.” Yahoo’s stock will likely plummet to near its pre-bid point, and it could face stockholder revolt.

Yahoo! has threatened to outsource search advertising to Google, either to ward off a Microsoft bid or to intentionally cannibalize a key Yahoo! business in the event of a hostile takeover. (Apparently Yang was threatening to burn Moscow.) However, such a deal would face regulatory scrutiny, as an alliance of the #1 and #2 search providers would leave an overwhelming 85% of the market in Google’s hands. In addition, it would essentially throw away the heaps of work that Yahoo! has been doing in that critical arena. Even by signaling it would consider such a deal, Yahoo! is practically admitting defeat.

While most pundits see this outcome as a loss for Yahoo, there is also the belief that Ballmer botched the deal. Still, if Yahoo stock drops to bargain basement levels, Microsoft could return later this year with another deal. Alternatively, it could pick up the scraps of AOL or expand its Facebook alliance.

UPDATE 5/5/08 12:27 AM: Sure enough, Yahoo stock has fallen 17% (and counting), while Google and Microsoft have gained.

Further reading:
Microsoft Press Release
MSNBC Article
MarketWatch Article
Yahoo’s Nightmare Scenario: I’m From Google and I’m Here to Help!
Microsoft To Yahoo: Take a Hike!
Yahoo Responds: “The distraction of Microsoft’s unsolicited proposal now behind us”
Microsoft has options after dropping Yahoo bid
Yahoo CEO Yang is now on the hot seat
Ballmer’s drive was key element in Yahoo bid