Beyond Binary

CARLSBAD, Calif.--While all big CEOs are under scrutiny, the attention focused on Jerry Yang has been particularly intense. That intensity was on evidence during Wednesday's appearance at the D:All Things Digital conference here.

Colleague Dan Farber offered his thoughts about how they did, while Webware's Rafe Needleman posted a live blog. But I think the video itself is worth checking out to give a full view of what things look like on that very warm chair.

Here's part one:

And here's part two:

Click here for full coverage of the D: All Things Digital conference.

Here is the text of the letter Microsoft CEO Steve Ballmer sent to Yahoo chief Jerry Yang after talks broke down on Saturday.

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

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

Microsoft's billions appear to have Yahoo's board divided, according to a report Friday in the New York Post.

On Monday, Yahoo sent out a press release stating that the board had "unanimously" rejected the bid.

But some of the company's independent directors apparently don't detect a solid alternative to selling to Redmond and see CEO Jerry Yang as taking an "emotional" anything-but-Microsoft approach.

In one camp are Yahoo Chairman Ray Bostock and billionaire investor Ron Burkle, according to the newspaper, while Yang appears to have support from Softbank's Eric Hippeau and Activision CEO Robert Kotick.

"The emotional part of Yang would rather do anything but sell to Microsoft, but he doesn't have the cards to come up with a value-creating, competitive alternative for shareholders," an unnamed source told the Post.

Yang's approach is also said to have some independent directors worried about lawsuits that they are not doing their fiduciary duty by negotiating with Microsoft.

It's worth noting that in Yahoo's press release on Monday, the company stated that its independent directors have obtained separate legal advisers from the company's overall counsel.

Jerry Yang has already gotten calls from Steve Ballmer and Eric Schmidt, but he's having trouble filling up the rest of his five faves.

Try as Yahoo might, apparently no one wants to bid against Microsoft's bulging bank account.

The Wall Street Journal reported Tuesday night that no serious bidders have emerged to rival Microsoft's $44.6 billion bid for Yahoo. The one party most interested in scuttling Microsoft's efforts--Google--faces uphill regulatory battles in almost any kind of partnership, alliance or investment it might want to do.

The clock is ticking. Does anyone other than Ballmer want to add Yang to their friends and family?