Beyond Binary

Microsoft says its offer for Yahoo is off the table, but could this be just a negotiating ploy?

It's a natural question to ask. I mean, if Microsoft has had the hots for Yahoo for two years, can it really be so sure that it is no longer interested?

My take is that Microsoft has ruled out two options, but that one possibility for Yahoo remains out there.

Clearly, Microsoft is not having luck getting Yahoo to consider the price it is willing to pay, so the direct option hasn't worked. CEO Steve Ballmer says that Microsoft has also ruled out going directly to shareholders, a move that would likely require a nasty, costly, and time-consuming proxy fight.

In particular, Yahoo has proven itself adept at making itself a less attractive takeover target. In addition to the usual sorts of poison pill defenses, it has found other weapons like cutting sweetheart deals for employees and negotiating a partnership with Google, the very company Microsoft is looking to rival.

Such a move might not pass regulatory muster, but Ballmer indicated in his letter to Yahoo's Jerry Yang that Yahoo's moves have succeeded in making the proxy battle sufficiently unattractive.

"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," Ballmer wrote. "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."

From my point of view, though, it doesn't mean Microhoo is totally dead. Even though several doors seem closed, I see one door that could swing back open. Yahoo shareholders may find it tough to swallow the fact that Yang said no to $33 a share and push him back to the negotiating table. In that scenario, the Yahoo that Microsoft finds so attractive could once again be on the market.

There's also the possibility that Yahoo tries to go it alone for a little while, stumbles, and Microsoft comes back with a new offer.

For his part, Gartner analyst Allen Weiner thinks Microsoft really did walk away. "I think the drama is pretty close to being over," he said. Microsoft and Yahoo both think they can rebuild themselves to their glory days on their own, he said.

That's not to say that a good feint can't seal a deal.

Oracle walked away from its bid for software maker BEA Systems when the companies couldn't come close to a price. But both companies returned to the table and ultimately negotiated an amicable deal. (Though it's also worth noting that Oracle ended up paying far more than its original offer.)

News.com's Stephen Shankland contributed to this report.

With Yahoo apparently off the table, it's time to see what Microsoft's back-up plan looks like.

Microsoft has said for some time that it has a strategy with or without Yahoo, but it's a strategy clearly in need of a jump-start.

In search, for example, Microsoft has been trying to take on Google for some time, but it remains a distant third in search queries and also has struggled in the all-important battle of monetizing each search query.

Microsoft outlined two key reasons for buying Yahoo--adding its talented engineers and getting the significant boost in scale that would come from buying the No. 2 player.

Clearly, Microsoft could use just a fraction of those billions and get a ton of engineering talent. The scale problem, however, is a more challenging one. As Microsoft CEO Steve Ballmer himself said in a meeting with employees on Thursday, there just aren't that many companies out there with any significant scale.

As for where else the company may look, Ballmer's recent comments to The Wall Street Journal offer a cheat sheet to the short list.

"There's really only five or six that really have any scale," Ballmer said in that interview. "Worldwide, you'd maybe get seven or eight."

Among those companies with scale that Ballmer named were Facebook, MySpace.com, and AOL, along with the Yahoo, Google, and Microsoft itself.

Although Facebook and MySpace have huge audiences, selling advertising against those sites has proved to be trickier than in search. Plus, Microsoft had to agree to a massive $15 billion valuation for Facebook just to get an ad deal and a small slice of the company. MySpace, meanwhile, has an add tie-up with Google. AOL is certainly seen as in play, having been a frequent rumor target as a potential partner for Yahoo.

Still, Ballmer said in his letter to Yang and in a public statement that he will look at other business moves and may expect other deals to follow.

"I wouldn't be surprised to see Microsoft going on a buying spree to buy some of the things they thought they might be getting from Yahoo," said Gartner analyst Allen Weiner. "I think they'll look seriously at some of the significant Web 2.0 companies and what they might add to the Microsoft label."

There's also the possibility that Microsoft makes another try at Yahoo once the dust settles a bit. I'll explore this in a follow-up piece.

News.com's Stephen Shankland contributed to this report.

Microsoft officially pulled its offer for Yahoo on Saturday, confirming an earlier report by CNET News.com.

In a letter to Yahoo CEO Jerry Yang, Microsoft chief Steve Ballmer confirmed that Microsoft was willing to offer $33 a share, but that Yahoo was holding out for at least $37 a share, or $5 billion more than Microsoft was prepared to spend. In the letter, Ballmer also says he is ruling out a direct offer to shareholders.

"This approach would necessarily involve a protracted proxy contest and eventually an exchange offer," Ballmer said. "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."

Ballmer specifically pointed to Yahoo's plan to outsource its paid search to Google. "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," Ballmer said.

Such a move, Ballmer wrote, would undermine Yahoo's strategy and long-term viability, hurt its ability to retain engineers, and pose regulatory and legal problems.

Ballmer said in a statement that Microsoft would pursue its own strategy.

"After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," he said. "We have a talented team in place and a compelling plan to grow our business through innovative new services and strategic transactions with other business partners. While Yahoo would have accelerated our strategy, I am confident that we can continue to move forward toward our goals."

In the letter to Yang, Ballmer again made the case that Microsoft's offer was the best option for Yahoo shareholders.

"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," Ballmer said. "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."

Update 5 p.m. PDT: Microsoft has made its move official. Click here for the story and here for the text of a letter Ballmer sent to Yang.

Microsoft is withdrawing its offer for Yahoo after talks between the two companies broke down on Saturday, a source told CNET News.com.

Microsoft hiked its offer to $33 a share, but Yahoo was holding out for $37 a share, the source said. The two sides met face to face again Saturday, but remained far apart.

Although price was a key issue, Microsoft also had strategic concerns and saw it as unlikely to achieve a friendly integration process. According to a source close to Microsoft, Yahoo founder and CEO Jerry Yang had "unrealistic expectations."

Microsoft made its $31 a share cash and stock offer on February 1. Yahoo rejected the bid as undervaluing the company, and the two sides had only the most basic of negotiations until Microsoft set a three-week deadline last month. Negotiations heated up on Friday, but the two sides remained far apart.

The move leaves both companies in a tenuous spot. Although Microsoft has said it has a strategy to take on Google without Yahoo, Yahoo represented the biggest opportunity for Microsoft to gain scale against its rival, which has a much larger Internet advertising business.

Yahoo, meanwhile, has had talks with AOL and Google, but it is unclear whether deals with either would produce the kind of immediate return for shareholders that a Microsoft deal would offer.

Microsoft is expected to announce its move publicly shortly, according to the source.

Microsoft sent out a cryptically worded media alert on Sunday, indicating the software maker planned to have a teleconference bright and early Monday morning.

Even more strangely, the company quickly killed the media alert, offering no details on what it was that it had planned--but no longer planned--to announce.

A source familiar with the first-news, now-not-news, said that Business Division head Jeff Raikes has been busy on the mergers and acquisitions front, not planning his own departure or some secret reorganization.

Does anyone know who is the apple of Raikes' eye?