Microsoft’s decision to walk away casts a cloud of uncertainty over Yahoo and its shareholders. The breakdown in the talks is likely to send Yahoo’s shares plunging, and Mr. Yang and his team will have to decide how to placate investors.
The company has been exploring alternatives to a marriage with Microsoft, including a partnership in search advertising with its arch rival, Google, which could lift Yahoo’s profit and perhaps its stock price. Yahoo has also discussed possible mergers with the AOL unit of Time Warner and the MySpace unit of the News Corporation. The MySpace talks have not been active of late.
But both remaining options pose challenges. A Google partnership would be likely to attract scrutiny from regulators because of Google’s dominance over online search and advertising, while AOL and Yahoo have many overlapping businesses and technologies, making a merger difficult.
In a statement issued late Saturday, Mr. Yang said, “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.”
Reactions inside Yahoo are likely to be mixed. Several senior executives favored selling to Microsoft and said in recent days that they were hoping to see a deal happen. Yet other executives were high-fiving each other for defeating Microsoft’s bid, people close to the company said.
While its stock may fall on Monday, Yahoo’s management was encouraged by discussions with its largest investors in which they urged management to not accept $33 a share, these people said. For Mr. Yang, Microsoft’s withdrawal is considered a “personal victory,” according to one person who spoke with him.
Microsoft has spent years and billions of dollars trying to build an online business. Yet it has steadily lost ground to Google in the search business and has failed to gain significant momentum with advertisers.
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Microsoft’s decision to abandon its pursuit of Yahoo is not necessarily the last chapter in the three-month-old saga. If Yahoo’s shares fall significantly, the company will be under intense pressure to act, and may choose to resume negotiations.
Earlier this year, under intense shareholder pressure, BEA Systems did just that, agreeing to a takeover by Oracle soon after Oracle dropped an unsolicited offer it had made for BEA.
“This seems like a very strong but serious negotiating tactic,” said Jonathan Miller, the former chairman and chief executive of AOL. “It will be up to Yahoo to come back to the negotiating table.”
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Microsoft had threatened to pursue a hostile takeover if it could not come to an agreement with Yahoo’s management. That could have involved an appeal directly to Yahoo’s shareholders and an effort to remove members of Yahoo’s board of directors.
In a letter to Mr. Yang sent on Saturday afternoon, Mr. Ballmer wrote: “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.”
He added: “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.” Mr. Ballmer took particular aim at Yahoo’s discussions of a partnership with Google, noting that it would “make an acquisition of Yahoo undesirable to us for a number of reasons.”
Microsoft’s decision to abandon its bid is likely to raise questions among investors about the judgment of both Microsoft and Yahoo.
When Microsoft made its initial bid, it said Yahoo was an important part of its strategy to take on Google. Its choice to withdraw, after threatening to force a shareholder vote, may prompt its shareholders to doubt its resolve. At the same time, many Microsoft shareholders who did not want the company to bid for Yahoo may be relieved and send shares of Microsoft higher on Monday.
For Yahoo’s shareholders, the abandoned bid may create even more uncertainty over the company’s management. Many Yahoo shareholders would have preferred that the company accept the offer of about $47.5 billion, which was roughly 70 percent higher than the company’s market value at the end of January.
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Over the last three months, the companies had infrequent talks, according to people involved in the negotiations from the start who were not authorized to be quoted by name.
Frustrated by the lack of discussions, Microsoft sent a threatening letter to Yahoo on April 5 suggesting that Microsoft would try to force a shareholder vote to circumvent Yahoo’s management if the companies could not reach an agreement within three weeks. At the same time, Microsoft began seeking a partner for its bid, holding talks with the News Corporation, controlled by Rupert Murdoch, as well as AOL. Both of those companies had been holding concurrent negotiations with Yahoo about their own partnerships.
On April 15, Microsoft and Yahoo held a secret meeting in Portland, Ore., in which the companies discussed “social issues” — like who would run the Yahoo unit if it were folded into Microsoft — but no decisions were made.
Three days later, bankers for Microsoft and Yahoo held a conference call in which Yahoo’s bankers suggested that $40 a share would be a “slam dunk” that would get the deal done. A week later, Microsoft’s deadline passed without Microsoft proceeding with a proxy contest as it had threatened. Microsoft decided that it would still try to seek a friendly deal and that a hostile bid could impair the value of Yahoo.
Last Tuesday, three days after the deadline, Mr. Ballmer and Mr. Yang had several telephone conversations as Yahoo sought to reach a deal to keep Microsoft from turning hostile. In those talks, Mr. Yang overruled his bankers, telling Mr. Ballmer that Microsoft did not have to go as high as $40 a share to get a deal done, and suggested that they begin negotiations.
The next day, Microsoft and Yahoo began talks in earnest, pulling in dozens of bankers and lawyers to try to reach a deal. Mr. Ballmer flew to Yahoo’s headquarters in Sunnyvale, Calif., where Mr. Yang said Yahoo would be willing to accept nothing lower than $38 a share. Each dollar per share is equal to about $1.4 billion.
Microsoft pushed back, saying it would pay no more than $33 a share. The talks culminated in a final meeting on Saturday in which Mr. Yang flew to Seattle to meet with Mr. Ballmer. Mr. Ballmer stuck to his $33 price, and Mr. Yang said Yahoo’s board would accept $37 a share. Hours later, Mr. Ballmer sent Mr. Yang the letter saying Microsoft would withdraw its bid.
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Microsoft has announced it is dropping its bid to acquire one of their Internet competitors, Yahoo!, after a three-month courting effort by Microsoft.
Steve Ballmer
Microsoft chief executive officer, Steve Ballmer notified Yahoo! chief executive officer, chairman and co-founder, Jerry Yang via a letter that Microsoft was dropping their bid for the Sunnyvale, California based search engine giant.

In a press release from Microsoft, Ballmer said, “Despite our best efforts, including raising our bid by roughly US$5 billion, Yahoo! has not moved toward accepting our offer. 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”.

Microsoft withdrew its bid effort after raising their bid from $44.6 billion to $47.5 billion, which works out at $33 per share. However, Yahoo! were waiting for a bid of around $53 billion, which was more than Microsoft were willing to pay.

Microsoft had previously wanted to takeover Yahoo! in-order to compete with Google, the market leader in online advertising.  The online advertising market was worth $40 billion in 2007 and will rise to an expected $80 billion in 2010.

Some observers, however, are speculating that the bid withdrawal could just be another tactic in their attempt to acquire Yahoo!. Yahoo shares have dropped since the bid was pulled out.