Microsoft Walks Away...
Microsoft Says Volumes...by Walking Away
When news about Microsoft walking away from the
Yahoo purchase appears on the front page of the Sunday New York Times, above the fold, it isn't a business story...it's an Event.
Microsoft CEO, Steven A. Ballmer, sent a letter to Jeffrey Yang, Yahoo's CEO and co-founder, on Saturday, bringing to a definitive conclusion a drama that began January 31st.
In that letter, after a lengthy commercial minuet, Mr. Ballmer informs Mr. Yang in the final paragraphs "I hereby formally withdraw Microsoft's proposal to acquire Yahoo!."
...and then, the penultimate paragraph in that letter - "But clearly a deal is not to be." (Mr. Ballmer's letter is reproduced below in its entirety, as released to the news services.)
Here's the timeline, as best we can stitch it together ---
--- On the table: an April 26th deadline from Microsoft to Yahoo to make a decision on its offer. Microsoft hints that it reserves the right to pursue the acquisition as a hostile takeover.
--- On April 29th, Messrs. Ballmer and Yang had several phone conversations as Yahoo sought to reach a deal in order to prevent Microsoft from going hostile.
--- Investment bankers were encouraging Microsoft to bid $40 a share. Yahoo has 1.4 billion shares outstanding. Hence, this increased the bid from the original $44 billion to $56 billion.
--- Perhaps Mr. Yang "saw" Mr. Ballmer's mouth drop over the phone at a $40 per share price tag --- a price incidentally that directly determines the amount of fees paid to the bankers.
--- Mr. Yang was said to have overruled his bankers, and on April 30th, told Mr. Ballmer that he did not have to pay as high as $40 per share.
--- The next day, May 1st, sensing a palpable opportunity to reach agreement with Yahoo, Mr. Ballmer took the initiative to fly to Yahoo's Sunnyvale, California Headquarters, where he was informed Yahoo would accept $38 / share.
--- If nothing else, that trip took $2.8 billion off the Yahoo price tag for Microsoft. While still at Yahoo HQ, however, Microsoft replied that it could go no higher than $33 per share, its first increase in offered purchase price, and, as it turns out, its final offer.
--- All talks culminated in a meeting yesterday, Saturday, May 3rd, but this time, Yahoo flew to Seattle to let Microsoft know it could accept $37 / share.
--- Microsoft stuck to its guns, at $33 per share, and said so to Mr. Yang / Yahoo, who then left the building.
--- The letter from Microsoft's Ballmer to Yahoo's Yang was sent that very Saturday afternoon, and appears below, as it came across the news services at approximately 8 pm ET.
--- It's entirely possible that this letter had already been written prior to Yahoo's arrival in Seattle. This is total speculation, of course, but it seems unlikely a letter of such magnitude could be prepared in just a few hours after Yahoo's departure from Microsoft's HQ.
The Event this portends is for another post. Meanwhile, the letter to Yahoo's CEO, Mr. Yang, from Microsoft's CEO, Mr. Ballmer follows...
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,
/s/ Steven A. Ballmer
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