Despite a brief moment of optimism heading into Saturday, Microsoft and Yahoo were really never closer to doing a merger deal than two ships passing in the night.
There was almost no discussion of price, and those talks that were held suggested to Microsoft that Yahoo was never really prepared to sell itself to the software company, according to a source familiar with the negotiations.
News.com Poll
A source familiar with Yahoo's negotiating stance disputed the characterization. However, judging by Yahoo's relative intransigence on price and insistence on several other requirements, it's clear the company wasn't eager to strike a deal. The company didn't want to let it itself be sold at what it deemed a "fire sale" price, the source familiar with Yahoo's position said.
Yahoo wasn't eager to rush things. Although Microsoft made its
Asked by Microsoft CEO Steve Ballmer where Yahoo stood on a takeover price, Yahoo executives responded that they didn't really have one. On April 18, there was a follow-up call with five bankers representing the two companies, sources familiar with the negotiations said. Yahoo's bankers indicated during the call that the company was only prepared to do a friendly deal at $40 a share or higher, sources said; Yahoo began its negotiations with that price because that's what Microsoft had offered in a bid to acquire Yahoo in 2006. That was the only discussion on price until this week, one source said.
Yahoo indicated to Microsoft this week that it might be willing to do a deal at a price lower than $40, and Microsoft later told Yahoo that it was willing to increase its offer by a couple dollars a share. On Friday, Microsoft said it was willing to offer $33 a share, which it viewed as a substantial increase from its original offer given that the original cash-and-stock offer had dropped below $30 a share.
The two sides arranged agreed to meet face-to-face at Seattle's Sea-Tac airport to discuss the revised positions. Microsoft and its bankers headed into the meeting with a fair amount of optimism because that they believed Yahoo shareholders were willing to do a deal at close to Microsoft's improved offer of $33 a share. However, at the meeting, Yahoo co-founders Jerry Yang and David Filo said their board was willing to do a deal around $37 a share, but that they would rather see a deal at around $38 a share.
The disagreements were not confined to price, sources said. Shortly after the April 15 Portland meeting, Yahoo gave Microsoft a list of nonfinancial deal terms.
"They were complete non-starters," one source said.
Yahoo wanted Microsoft to go through an antitrust review that Microsoft believed would have take several months to complete, sources said. One particular area of concern to Yahoo was the combined strength in e-mail that would Microsoft would have by combining Yahoo Mail and Microsoft's Hotmail, and the complications and risks of splitting off parts of the combined business, one source said.
Other conditions that rankled included a breakup fee--essentially, money Microsoft would have to commit to pay to compensate Yahoo in case the deal fell through down the road because of some issue such as regulatory review. And Microsoft was strongly displeased with a provision, added to Yahoo bylaws after Microsoft announced its acquisition proposal, that would require severance payments to all Yahoo employees in the event of acquisition-related layoffs.
"Jerry didn't want to sell the company," one source familiar with the negotiations said.
The source declined to go into specifics regarding Yahoo's demand for review, but said the two sides were as far apart on nonfinancial issues as they were on financial ones.
CNET News.com's Stephen Shankland contributed to this report.
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 discussions with Yahoo "intensified" Friday as the two companies considered possibilities for a last-minute friendly acquisition, The Wall Street Journal reported, citing anonymous sources.
While a deal is far from imminent, the two sides are talking more directly than they have for some time, a source familiar with the situation told CNET News.com. The talks, which picked up steam on Friday, are being held in the San Francisco Bay Area, with at least some of the parties on both sides meeting in person, the source said.
And The New York Times had a similar assessment, citing a source who said talks were back on and that Microsoft had increased its offer by "several dollars." Late Friday afternoon, the Journal said that the two companies were "discussing a possible price in the mid-$30s range per share."
The purported talks, if successful, could spare Microsoft the trouble and time of a hostile bid for the search company, if indeed it chooses not to walk away from its three-month-long attempt to acquire Yahoo.
The talks are no guarantee a deal will close, but investors found the evidence convincing. Yahoo's stock rose $1.82, or 7 percent, to $28.63, in late-day trading.
It should be noted that Microsoft's position, as viewed through the "people familiar with the matter" who have The Wall Street Journal on speed dial, has changed dramatically in a short period of time. In the last day, Microsoft has moved from threatening to walk away, to threatening go hostile with the acquisition, to back in "intense" talks.
But posturing is par for the course in any serious negotiation.
If you're buying a car, for example, threatening to walk away and then insisting you won't settle for a higher price can help minimize the amount you end up paying.
Microsoft has various options to consider in its attempt to acquire Yahoo. Hostile ones include making a tender offer directly to shareholders and offering an opposing slate for election to Yahoo's board of directors.
This report was jointly written by News.com staff writer Stephen Shankland.
Update 1 p.m. PST: Added analyst comments throughout.
While Microsoft is no Oracle when it comes to acquisitions, the company has been getting accustomed to cracking open its oversized wallet.
Historically, Microsoft has focused largely on smaller deals to acquire technology, as opposed to megadeals to buy established businesses. Microsoft is, of course, in the throes of a multibillion-dollar bid for Net pioneer Yahoo.
"It's a different type of acquisition for Microsoft," Directions on Microsoft analyst Matt Rosoff said of the Yahoo bid. "It's a new way of thinking." (Rosoff is a contributor to the CNET Blog Network.)
The company has made a few larger deals over the years. (Check out the chart to see the details.)
| Microsoft buys Although Microsoft isn't known for its massive acquisitions, the company has made some sizeable purchases over the years. Here's a look at some of the company's largest deals. | ||
| Company | Year | Estimated cost |
| Fast | 2008 | $1.2 billion |
| Aquantive | 2007 | $6 billion |
| Tellme | 2007 | $800 million |
| Navision | 2002 | $1.33 billion |
| Great Plains | 2001 | $1.1 billion |
| Visio | 1999 | $1.3 billion |
| Hotmail | 1998 | $400 million |
| WebTV | 1997 | $425 million |
| Source: CNET News.com | ||
The Internet has been the source of several of Microsoft's biggest purchases, dating back to the purchase of WebTV and in the 1990s, both deals that set back Microsoft by several hundred million dollars.
WebTV's subscriber base of folks using their TVs to get their e-mail largely plateaued at the 1 million mark, making the deal pricey from that standpoint. However, both the technology and the people helped form the basis of the Microsoft TV unit, which now focuses on Internet Protocol television. Hotmail was left alone for years, but has assumed new prominence as part of Microsoft's broader Windows Live push. As for the economic return, Web-based e-mail has not yet proved to be a huge money maker for any of the market leaders, though Google, Yahoo, and Microsoft are working hard to change that.
Microsoft used several purchases, most notably that of Great Plains Software in 2001 and Navision in 2002, to get into the business application space. The company has a decent-size business with its Dynamics line, but efforts to unify the products have proved thorny from both a technical and customer acceptance standpoint.
Microsoft painted a much brighter picture when it bought those companies, Rosoff said. "Those expectations weren't met."
It's too soon to say how Microsoft will fare with two recent acquisitions, including Microsoft's $6 billion purchase of Aquantive, as well as last year's purchase of Tellme Networks. Microsoft certainly has big hopes for both--counting on Tellme to help in everything from the Office unit to mobile search and hoping Aquantive will make it a more serious player in the online advertising space. But if Aquantive is a big bet on online advertising, Microsoft is more than doubling down by pursuing Yahoo.
Also, while Microsoft likes to point to its track record as a reason why it will be able to handle integration issues, it's important to note that almost all of these acquisitions took Microsoft into new businesses, with minimal overlap. A purchase of Yahoo will have tons of overlap, not to mention all of the cultural issues. Oh yeah, and there's also the matter of Yahoo not returning Microsoft's phone calls.
- prev
- 1
- next
