Updated at 2:35 p.m. with a source clarifying that this letter does not mean talks are off.
On Wednesday, Yahoo issued a letter to shareholders defending its pact with Google as compared to a search deal with Microsoft.
"This carefully structured agreement strikes the right strategic balance, enhancing our financial results while advancing our strategic objectives of being the 'starting point' for the most users on the Internet and offering such compelling value that advertisers will see us as the 'must buy' in online advertising," Yahoo Chairman Roy Bostock and CEO Jerry Yang wrote in the letter, which was sent out via Business Wire.
At first blush, I took this as an indication that the latest talks, which were first reported by CNET News.com on Monday, were off again. However, a source familiar with the situation cautioned that such a reading would be a mistake.
The letter urges shareholders to vote for its director slate and against that put forth by Carl Icahn. In the letter, Yang and Bostock argue that Microsoft's proposal would have tied Yahoo's hands without offering a significant improvement to its cash flow.
"While Microsoft's search-only hybrid proposal may have been helpful to Microsoft, our board and management concluded it would have had a significant adverse impact on Yahoo! strategically, leaving the Company without the operational control of search assets and technology we view as critical to our objective of becoming a leader in the converging search and display advertising business," Yang and Bostock wrote. "The board and its advisers also carefully studied the financial impact of Microsoft's proposal and concluded that it would have provided no meaningful improvement to our operating cash flow. In short, this proposal would have generated substantially less value for Yahoo stockholders than Microsoft has suggested."
The source I talked to pointed to the exclusiveness of the deal as a key stumbling block with the original proposal from Microsoft and noted that the Google deal was a nonexclusive one.
As of June 12, when talks broke down with Redmond, Microsoft was proposing a deal in which it paid $1 billion for Yahoo's search business as well as giving it a cut of future revenue from Yahoo's search results. It would have also paid $8 billion for a 16 percent stake in the company. Microsoft argued the additional ad revenue as well as the decrease in costs would have meant $1 billion in additional cash flow per year. Yahoo disputes that math.
Microsoft said it offered to guarantee Yahoo that its search monetization would be better than that of Yahoo's Panama for the first three years.