Shock and Awe: Microsoft Dumps Yahoo!

This weekend, Microsoft abruptly ended its takeover bid for ailing online giant Yahoo! after failing to come to terms on the value of the transaction. In a letter to Yahoo! CEO Jerry Yang, Microsoft CEO Steve Ballmer raised his company's bid for Yahoo! by $5 billion to $33 a share. But Yang said that Yahoo! could not accept less than $37 a share. So Ballmer yanked the offer, leaving Yahoo! to fend for itself, both with competitors and with its increasingly agitated shareholders, many of whom eagerly sought a Microsoft merger.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer," Ballmer said in public statement. "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."

Both companies cited other factors that led to the disagreement. In his letter to Yang, Ballmer noted that Yahoo!'s recent test of outsourcing its search technologies to industry leader Google was particularly troubling. Ballmer said that such a move would "fundamentally undermine Yahoo!'s own strategy and long-term viability," "impair Yahoo's ability to retain talented engineers ... that are important to \[Microsoft\]," and "would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit."

In Yang's typically terse, response, he simply reiterated Yahoo!'s tired and increasingly unbelievable stance that Microsoft's offer "undervalued" Yahoo!. But sources close to the company say the situation is more complicated: Yahoo! was concerned that any merger with Microsoft would be blocked by antitrust regulators in the US or Europe and thus wanted a higher offer as a hedge against that potential outcome.

Regardless of the reasons, the cessation of merger talks leaves both companies to deal with the perception of failure. Microsoft had never made such a financially risky or aggressive takeover bid, and the company repeatedly claimed it needed Yahoo!'s resources to help it "scale" to compete more effectively with Yahoo!. Meanwhile, Yahoo! is on a steady downward path, as clearly indicated by its willingness to outsource core technology to its biggest competitor. While it's unclear how or if Microsoft will improve its market share online, one thing is clear: Yahoo! is on the way out.

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