Microsoft, Yahoo to rethink Internet options

By The Wall Street Journal

Yahoo (YHOO, news, msgs) Chief Executive Jerry Yang didn't really want Microsoft (MSFT, news, msgs) to buy his company. By Saturday, Microsoft CEO Steve Ballmer didn't want that either, leaving both technology giants facing fundamental questions about their futures.

The failed courtship leaves Microsoft with limited options for quickly expanding its presence online. However, it might not close the door to the software maker's pursuing a bid for Yahoo in the future. (Microsoft owns and publishes MSN Money.)

In a letter to Yang on Saturday in which he withdrew Microsoft's acquisition offer, Ballmer cited a divide over price, saying Microsoft had been willing to raise its offer for Yahoo to $33 a share, or about $47.5 billion, and Yahoo demanded at least $4 a share more.

Microsoft's pursuit of Yahoo was among the latest moves in the scramble by technology and media companies to capture the flood of advertising dollars moving online and to block Web powerhouse Google (GOOG, news, msgs) from extending its dominance in online-search advertising.

• Talk back: Is the collapse of Microsoft's Yahoo bid a good thing? 

Ballmer had said in recent days that he was confident Microsoft could go it alone to build a competitive online-advertising business without buying Yahoo.

At the same time, he had faced skepticism from within Microsoft about its ability to pull off such a large acquisition at a time when the software maker faces many other challenges.

Ballmer himself had shown hints of such doubts in recent weeks, said people familiar with the matter.

He also squared off against a company increasingly convinced it was worth much more than Microsoft had been offering. While Yang and Yahoo directors preferred from the start that the Internet company stay independent, they were particularly emboldened by the success of a test late last month in which Yahoo carried search advertising from Google.

"There was just nothing that showed any sign of this potentially coming on track," said one person familiar with Microsoft's thinking, who questioned Yahoo's stated willingness to sell the company to Microsoft at the right price.

But some people close to the matter believe that the two sides could have found a middle ground if negotiations continued, particularly since some of Yahoo's major shareholders had signaled late last week they would support a takeover by Microsoft at a price in the range of $34 or $35 a share.

Having averted a sale to Microsoft, Yang probably will have to placate shareholders who had been hoping for a deal. Yahoo shares, which closed at $28.67 on Friday on the Nasdaq Stock Market, opened this morning at $23.05.

Yahoo is hoping to seal a broader search-ad pact with Google in the coming days, but antitrust experts warn that will surely encounter intense regulatory scrutiny. And Yahoo, which has struggled to focus and execute its plans in recent years, faces deep skepticism from investors about the financial targets it has released for 2009 and 2010 to justify its value on its own.

Microsoft's withdrawal diminishes prospects that Google will face a dramatically bulked up competitor in Web search and online advertising anytime soon. Now, Google is likely to handle at least some of Yahoo's search-advertising business, and Microsoft is heading back to the drawing board to consider its own options.

"It's disappointing because one would hope there would be a more balanced marketplace," said Sir Martin Sorrell, chief executive of advertising company WPP Group. "Google's dominance continues."

Microsoft still could end up buying Yahoo. If Yahoo's share price plummets, shareholders could step up pressure on Yahoo's board to agree to a deal at a lower price. Already several shareholders have sued the company over its rejection of the Microsoft bid.

Ballmer's letter Saturday appeared intentionally crafted to spell out to Yahoo shareholders how hard Microsoft worked -- and the amount it boosted its bid -- to entice Yahoo's board to enter a deal. That's a common tactic for a would-be acquirer hoping to inspire shareholder activism, and one used successfully by Oracle (ORCL, news, msgs) in last year's takeover fight for BEA Systems.

Continued: 'Economics don't make sense'

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