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This is the text of the e-mail Yahoo Chief Executive Jerry Yang sent to his company's staff Saturday after Microsoft withdrew its offer to acquire the Internet pioneer.

From: jerry yang

To: [Yahoo Employees]

Sent: Sat May 03 19:26 2008

Subject: today's news

yahoos,

today microsoft announced that it has withdrawn its proposal to acquire yahoo!. from the beginning of this process, our independent board and leadership team have maintained that microsoft's offer undervalues the company, and we're pleased that many of our shareholders agreed with us. our board and leadership team now remain focused on maximizing shareholder value and pursuing strategic opportunities that position us for success and leadership in our markets.

of course, we anticipate that microsoft's announcement will draw media attention and speculation as to what happens next for yahoo!. that means the spotlight will be on us - just as it has been for the past three months. i'm incredibly proud of how we've performed under such scrutiny, with last quarter's great financial results as a testament to everyone's hard work and focus. just as we did last quarter, now is the time for us to shine and show what we're made of.

with the distraction of microsoft's unsolicited proposal behind us, we must redouble our efforts. we should focus our energies on continuing to execute the most important transition in our history. how will we do this? by executing against the strategies and priorities we already have in place, and by continuing to deliver indispensable experiences for our communities of users, advertisers, publishers and developers.

in the end, it all comes back to who we are as a company. we have a spirit and a culture that is uniquely yahoo! - and we can't forget that. staying true to who we are has helped us pull through the recent uncertainty we've faced, and will continue to be an asset as we move ahead. there's a reason why we're the only fortune 500 company with an exclamation point at the end of our name, and now is the time to demonstrate what that exclamation point stands for.

over the next several weeks, sue and i plan to visit as many offices as we can to thank you in-person for everything you've done and continue to do for yahoo!. we hope you're as excited as we are about the future that lies ahead for all of us -- together as one yahoo!.

jerry

Here's the full text of Yahoo's response after Microsoft withdrew its offer to acquire the company.

Chairman Roy Bostock: We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo for success and leadership in its markets. 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 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. Today, Yahoo has:

• a refined strategic focus to drive enhanced volume and yield;

• reorganized to focus its efforts on its most promising products and services;

• invested in innovations designed to revolutionize display advertising and facilitate closing the competitive gap in search; and

• enhanced expense and resource management to support improved profitability.

CEO and co-founder Jerry Yang: I am incredibly proud of the way our team has come together over the last three months. This process has underscored our unique and valuable strategic position. 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.

Fear is a human emotion. It's part of our survival mechanism--the adrenaline fight or flight response. In ancient times when a caveman felt fear, he ran and hid or readied himself for battle. Those who paid attention to their fear survived; those who didn't, well, let's just say their descendants probably aren't around to read this.

Having courage does not mean ignoring fear. It means facing fear head-on and doing the right thing anyway. At least that's my definition. If you fail to face fear and act appropriately you're not necessarily a coward, but you're not the best you can be either.

The most successful people on the planet are the ones who face the cold, hard truth of reality and act accordingly. They don't surround themselves with "yes men" and they don't view the world through rose-colored glasses. ... Read more

Yahoo reported solid earnings for its first quarter, but by completely sidestepping discussion of the big Microsoft acquisition issues, the company left more unresolved than resolved.

The company had solid revenue growth, expressed cautious optimism about weathering an economic downturn, and modestly beat analysts' profit expectations. Chief Executive Jerry Yang issued lukewarm metaphors: "Our results this quarter demonstrate we are on the right track. We are pursing the right strategy, and it's beginning to bear fruit."

Yahoo CEO Jerry Yang

(Credit: Dan Farber/CNET Networks)

And in after-hours trading, the company's stock was essentially flat.

I'd say "Ho hum," but the stakes are too high right now. Unfortunately, Yahoo didn't show any of its cards.

Yahoo's financial results didn't carry an implicit conclusion, either. They weren't so bad that Microsoft's attempt to acquire Yahoo for $31 a share looks generous or so great that Yahoo shareholders will laugh off their suitor.

"The results, being neither fish nor fowl, presented a pretty clear outcome," said Gartner analyst Allen Weiner. "I think they're at that critical juncture where the best shareholder value they can give people is the $31 per share Microsoft has offered."

On a conference call to discuss the results, company executives stuck closely to a standard earnings script without advancing the discussion regarding the big issues:

• Selling to Microsoft. "Our board and management team continues to be open to any and all alternatives including a sale to Microsoft," Yang said, but, "We will not enter into any transaction that does not recognize the full value of this company."

• Partnerships such as one reported possibility to acquire AOL in exchange for an investment from Time Warner that could be used to repurchase Yahoo stock. The company is "expeditiously exploring a number of strategic alternatives," Yang said.

• A partnership to test Google's search ads alongside Yahoo's search results, a move that could increase the revenue per click that advertisers pay Yahoo. Yahoo gave passing mention to the test but said, in effect, "Stay tuned."

Given that Yang had no big news to announce, he had to walk a fine line on the conference call. He didn't want to throw in the towel to Microsoft, and he couldn't declare that Yahoo now has got Google running scared. And addressing touchy issues can open a can of worms during the question-and-answer period.

But just as there are consequences for saying something injudicious on the conference call, there are consequences to playing it too straight. If it wants to fend off Microsoft, Yahoo has to prove to its shareholders that its alternatives are real.

For example, sharing some preliminary results from the Google ad test could have helped advance the discussion about just how real some of the company's alternatives are. Analyst estimates accord 9 cents to Google for each ad clicked to 4 cents at Yahoo, so a partnership could be financially important.

Yahoo lost an opportunity to seize the initiative by rebutting Microsoft Chief Executive Steve Ballmer's latest take on the acquisition: "I wish Yahoo all the success with its results, but it doesn't affect the value of Yahoo to Microsoft."

Instead, Yahoo merely reported earnings. For seizing the initiative, I guess we'll have to wait for Ballmer.

In a new round of public letters, Microsoft CEO Steve Ballmer and Yahoo CEO Jerry Yang tussled about whether the software power is offering too much or too little for the Internet company. So who's right?

There's no simple answer here. It's tricky math, especially given overall declines in Internet stocks and the fact that Yahoo's worth is different depending on whether you consider it a standalone company or a part of Microsoft, which said it expects "at least $1 billion in annual synergy" from an acquisition.

But we surveyed a number of analysts--call it the wisdom of the equity analyst crowd. Opinions varied, but we didn't run into anyone who thought Yahoo could expect a dramatically higher price.

For background, Ballmer threatened Saturday that if a friendly deal isn't wrapped up within three weeks, the company will launch a proxy contest to try to elect its own board of directors. And if it goes that route, Yahoo should expect a lower offer, he said.

Microsoft CEO Steve Ballmer

(Credit: CNET Networks)

"The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal," Ballmer said in his letter to Yahoo.

Yang and Yahoo Chairman Roy Bostock responded Monday that Microsoft's offer is too low, though: "Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders."

Microsoft announced its desire to acquire Yahoo in February, in what would have been a cash-and-stock deal that amounted to $31 a share.

Yahoo's shares have increased significantly since the deal was announced, from $19.18 beforehand to $27.70 Monday. Microsoft's have dropped from $32.60 before the proposal was announced to a close of $29.16 on Monday; Yang and Bostock observed, "The value of your proposal today is significantly lower than it was when you made your initial proposal."

Jerry Yang, Yahoo's CEO

(Credit: Yahoo)

Analysts vary in their opinions about the price, with some calling $31 per share a fair deal and others expecting Microsoft to sweeten the deal.

"We think reaching a mutual agreement would be the best way for Yahoo to potentially extract a higher bid," UBS analyst Benjamin Schachter said in a report. And Microsoft might well be willing, he added. "We believe Microsoft's negotiation tactics are very similar to Oracle's in its quest to acquire PeopleSoft, and as such believe a slightly higher bid could still be in the cards."

Oracle's 18-month effort to acquire PeopleSoft began on a very acrimonious note when compared with the Microsoft-Yahoo deal, but ultimately Oracle's acquisition settled after its price rose sufficiently high. Oracle's opening offer of $16 per share was significantly less than the eventual price of $26.50 per share.

Referring to Microsoft's three-week deadline, Schachter said, "We think Yahoo has no choice but to enter into a deal within this time frame, as there are no other viable suitors in our view."

And Yahoo's position is losing strength because of declines overall in its category of companies, Steve Weinstein of Pacific Crest Securities said in an interview.

Full coverage
Microsoft's big bid for Yahoo

Click here for the latest on the software giant's attempt to buy the Net pioneer.

"When Microsoft made its bid for Yahoo, the share price was around $20," Weinstein said. With Yahoo's category declining overall, "it's a difficult argument to make that Microsoft's offer is unfair."

Derek Brown of Cantor Fitzgerald already sees $31 per share as a good deal. "When the deal was originally announced, we maintained a hold rating but raised the price target to $31 per share, believing that was a very healthy premium to where Yahoo had been trading and given what appeared to be deteriorating fundamentals in Yahoo's business," Brown said.

Brown said he doesn't know what Yahoo's "full value" is, though. "It would be interesting to see the measurements or comparables they (Yahoo) are using to determine that."

Mark Mahaney, a financial analyst at Smith Barney Citigroup, also said it's hard to value Yahoo definitively, or even whether to assess its value as a standalone company or as a part of Microsoft. But it's possible to estimate value based on financial results of other companies that recently have been sold--Aquantive, Digitas, and 24/7 Media, with Microsoft itself buying the first.

"There's a reasonable valuation support base for Yahoo being sold at between $31 and $34 (per share) by looking at what other Internet advertising companies have been bought for," Mahaney said.

Scott Kessler, equity analyst at Standard and Poor's, called $31 "a pretty fair valuation," based on how Yahoo's stock price compares to its earnings. "The reality is this is a difficult situation for Yahoo. Clearly Yahoo has had its share of difficulties over the last several quarters."

News.com's Elinor Mills and Stefanie Olsen contributed to this report.

Jerry Yang, Yahoo's CEO and co-founder, and Yahoo Chairman Roy Bostock issued a note to employees on Wednesday following the company's announcement that it is extending the deadline to nominate opposition candidates to its board. Here is the text of that memo:

Subject: update

yahoos

we want to update you on some news we announced this morning. yahoo!'s board has decided to extend the deadline for nominating directors to our board from march 14th to 10 days following our announcement of a date for our annual stockholders meeting. we have not yet announced the date of this year's meeting.

Full coverage
Microsoft's big bid for Yahoo

Click here for the latest on the software giant's attempt to buy the Net pioneer.

why did we do this?

in light of the current circumstances, this change removes an imminent deadline. microsoft, of course, could still choose to name directors, but our objective here is to enable our board to continue to explore all of its strategic alternatives for maximizing value for stockholders without the distraction of a proxy contest. it will also make it easier for you to continue to focus intently on delivering on our business strategies and creating value.

since we last updated you, our board and management team are aligned in ongoing efforts to explore a number of alternatives to create stockholder value. we believe we are making progress clarifying the many options available to us. and, of course, throughout this process, management and the board are both speaking with--and listening carefully to--our stockholders. this ongoing dialogue has provided us with helpful feedback.

let's all be clear about one thing: we have a great company, a company with a truly unique set of assets -- including our global brand, large worldwide audience, significant recent investments in advertising platforms, future growth prospects and the excellent momentum we have created behind our core business strategy. so it should come as no surprise that this situation is receiving such a high level of attention -- from national media to blogs.

we ask you to continue to put aside all the rumor and speculation you may be hearing. none of us should allow external reports to shift our focus away from doing what we do best -- transforming the experiences of our users, advertisers, publishers and developers, all while enhancing our leadership position in the online marketplace.

we want to thank all of you again for your continued hard work and dedication to yahoo!. we'll continue to update you as new information becomes available.

jerry and roy

New friends? Steve Ballmer and Jerry Yang

With Microsoft's pursuit of Google...I mean Yahoo...going into the end game, some are questioning the wisdom of plunking down about $45 billion on such a prize. Last week, Robert Breza, an analyst with RBC Capital Market, made the case for Microsoft chipping away at Google's search/ad lead in a less desperate manner with its adCenter platform, and instead investing the billions in business applications and social networking. Michael A. Cusumano, professor at the Sloan School of Management at MIT, recommends that Microsoft stay closer to its business software roots and acquire SAP. This advice won't provide much relief for Yahoo CEO and co-founder Jerry Yang.

Breza and Cusumano both make solid arguments but discount or miss what is going on as the Internet scales from a billion users to the entire planet. This is the period of software colonization, a land grab for consumers and businesses. Microsoft has realized that failing to make inroads in search and to annex more territory (users) and engineers (an army to build out and protect its colonies) could be fatal in the long run. Microsoft's future--Windows Live--is dependent on reaching billions of users, and providing monetizable services, ranging from a cloud-based Office to virtual games. And if it is successful in integrating Yahoo, which is not assured, the money will flow to make substantial acquisitions in other parts of its business.

For reference, Breza stated:

Currently, Microsoft doesn't have the scale in their search advertising platform, and this lack of scale has slowed them from making the "killer app" that combines one platform for users to target search, display, in-game, mobile, voice, and video marketing. These are all previous investments that depend on SCALE to make any further platform integrations reasonable. Online advertisers are ingrained in Google and Yahoo! platforms. Getting advertisers to spend on the additional overhead for a platform that is a distant third place in terms of search is a difficult task (it's been difficult for Yahoo which is a distant second).

It's possible to argue that without YHOO and a blank check for $45B, Microsoft could make investments that would bring scale over time, and also more synergies beyond just advertising. Salesforce.com at 100% premium is $12B, Omniture at 100% premium is $3B; and that leaves $30B to acquire Facebook. It could be argued that adapting/integrating these platforms with adCenter would bring advertisers/scale to the markets these businesses already serve (business and gen-x-y-z).

As Larry Dignan of ZDNet expressed it, "What opportunities will Microsoft forgo as it tries to integrate Yahoo?"

Clearly, it's a matter of priorities, and Microsoft views battling Google as the more strategic one. And, it's far more risky than adding a Salesforce.com to the mix. Yahoo could be a 1+1 = 1.5 integration nightmare, and Google would continue to grow its share of the search market. Microsoft would get half a billion users, but not necessarily their loyalty.

Randall Stross wrote the story in the New York Times citing Cusumano's idea that Microsoft swap Yahoo for SAP. He wrote:

Determined to match Google in search and online advertising, Microsoft has managed to overlook a plain-vanilla strategy, the oldest one in the book: build on its own strengths. What it does best is to sell software to corporations, for all sorts of applications, visible and not so visible, at a handsome profit.

If Microsoft thinks this is the right time to try a major acquisition on a scale it has never tried before, it should not pursue Yahoo. Rather, it should acquire another major player in business software, merging Microsoft's strength with that of another. This is more likely to produce a happier outcome than yoking two ailing businesses, Yahoo's and its own online offerings, and hoping for a miracle.

SAP, which would cost well above $60 billion, would be a reasonable acquisition for Microsoft. The two had discussions in 2003 regarding an acquisition to compete more effectively for large enterprise budgets versus Oracle, which since has brilliantly rolled up the enterprise application and middleware industry.

It's a matter of businesses priorities, and you have to credit the aging Microsoft warriors--Gates, Ballmer, Mundie, and Ozzie--for choosing the path less well traveled but the one that could have more significant impact.

Of course, there is the fear of what happens if Microsoft, or Google, is successful in colonizing a larger portion of the Internet.

The Terry Semel era at Yahoo is officially over.

The former Yahoo CEO, who left that position last summer but remained as non-executive chairman of the board, is now out of the company altogether.

Yahoo announced Thursday afternoon that Semel will immediately relinquish his spot on the board.

According to a company statement, Semel began talking with other board members several months ago about stepping down and "targeted the time of the January board meeting for his departure."

Whether that's true or not is something we will likely never know, but one thing's for sure: there are a lot of people who won't miss the Semel era too much.

Of course, the Jerry Yang era hasn't gotten off to too hot a start either. The Yahoo co-founder ascended to the CEO role when Semel left the seat last summer.

Earlier this week, Yahoo announced that it was planning to lay off 1,000 people amidst lower quarterly profits than in the same time period a year earlier.

The company said it had earned $206 million, or 15 cents a share, on $1.4 billion in revenue. And while revenue was up, the profit number was lower than the $269 million it earned a year earlier.

Last June, Semel stepped down from the CEO position he'd held since 2001 after it became clear his leadership was not taking the company where it needed to be.

Now, with layoffs, lower profits and an unsure future, Yahoo, which for years until Google eclipsed it was synonymous with the growth and success of the Internet, is facing an extremely uncertain future and a need to examine and define its true identity.

When word came Monday that Jerry Yang was replacing the embattled Terry Semel as CEO of Yahoo, we couldn't help flashing back all the way to last week to the company's annual shareholders meeting.

Jerry Yang

(Credit: Yahoo)

It couldn't have been a happy occasion for Semel, who was on the spot to defend Yahoo's performance, its executive pay packages (that is, his own very generous compensation), the unexpected departure of Chief Technology Officer Farzad Nazem, and on and on.

On that date, Yang was serving as the interim CTO, so one shareholder asked whether the Yahoo co-founder--long known as Chief Yahoo, along with co-founder David Filo--should be appointed to that post permanently.

The now ironic reply from Semel, just six days before Yang took his job in the corner office: "If Jerry would think hard about being our CTO, I would be very flattered and honored."

Funny how things work out sometimes.