May 3, 2008 7:21 PM PDT

Yahoo: Microsoft's price just wasn't right

by Stephen Shankland

Update 8:10 p.m. PDT: I added some detail about Yahoo's financial performance and its claims of progress. Update 7:35 p.m. PDT: I added more detail about Microsoft's maximum bid and Yahoo's minimum requirement.

Microsoft just wasn't willing to pay enough for Yahoo to make the deal worthwhile, the company said Saturday.

"From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view," Yahoo Chairman Roy Bostock said in a statement.

Microsoft withdrew its offer to acquire Yahoo after increasing its $31-per-share cash-and-stock bid to $33. Yahoo evidently thought that too low--Microsoft Chief Executive Steve Ballmer said Yahoo wouldn't go below $37.

Bostock also indicated that Yahoo thinks it can grow just fine on its own, even if he didn't declare Yahoo restored to financial vigor. However, he didn't share specifics about what's next for the company.

"Yahoo is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market. Our solid results for the first quarter of 2008 and increased full year 2008 operating cash flow outlook reflect the progress the company is making," he said.

Yahoo's first quarter, though, certainly didn't knock the ball out of the park, in stark contrast to Google's results the week earlier. Yahoo reported net income of $542 million, but excluding a $401 million non-cash gain related to its stake in Alibaba Group, that was flat from a year earlier. The fundamentals of the Microsoft situation remained unchanged, and the stock didn't budge.

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It's quite possible Microsoft will return again for another bid--particularly if Yahoo's share price plunges and the purportedly loyal shareholders agitate for fast change. But Yahoo Chief Executive Jerry Yang was willing to call the Microhoo saga at an end.

"With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners, and users," Yang said in a statement.

Yahoo claimed some successes, saying the company is working to improve ad volume and yield from those ads; reorganized to focus on its most promising areas; invested in the display-ad business and in catching up to Google in search-based text ads; and improved expense controls to improve profitability.

So what's next? Yahoo has a number of options, all inevitably to be seen through the lens of the company's stock price on Monday. Microsoft's offer more than three months ago sent Yahoo's stock up dramatically from $19.18 beforehand to $28.67 on Friday.

Yahoo, though, was unspecific about its plans.

Bostock said Yahoo remains focused on pursuing unstated "strategic opportunities." That covers a wide range of possibilities. No doubt shareholders will be interested to compare details with what Microsoft had to offer.

Stephen Shankland writes about a wide range of technology and products, but has a particular focus on browsers and digital photography. He joined CNET News in 1998 and since then also has covered Google, Yahoo, servers, supercomputing, Linux and open-source software, and science. E-mail Stephen, or follow him on Twitter at http://www.twitter.com/stshank.