Nothing to Yahoo about for Microsoft

The collapse of Microsoft's bid for Yahoo seems like bad news for everyone - except Google of course...

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Last Updated: 31 Aug 2010

As most of Britain basked in an unusually summery bank holiday, Microsoft revealed that it had withdrawn its $47.5bn offer to buy Yahoo, after failing to agree a price with the company’s board. The news sent Yahoo’s share price plunging 15% when the markets re-opened yesterday, leaving boss Jerry Yang with some serious explaining to do.

It wasn’t as if Microsoft was trying to hoover up the struggling Yahoo on the cheap. Even at the initial offer price of $31-per-share, the bid was a 62% premium on the previous stock price – and last week Microsoft boss Steve Ballmer apparently offered to throw in another $5bn, hiking the bid up to $33-per-share (a 70% premium – though admittedly his record at these things isn’t exactly impeccable). Most observers thought this would at least be enough to get Yang and co to the negotiating table – but they insisted on holding out for at least $37-per-share, eventually forcing Microsoft to pick up its ball and go home.

But if Microsoft is a bit miffed about three months of wasted effort, it’s not the only one. One group of small shareholders is apparently planning to sue the Yahoo board for failing to consult them about the deal, while another big investor is demanding that Yahoo launches a big share buy-back programme by way of compensation. One analyst even suggested that the rejection was ‘likely to go down as one of the more destructive decisions for shareholder value in the history of Internet stocks’ – and there’s some pretty tough competition in there…

All of which has forced CEO Jerry Yang firmly onto the defensive – he said on the company blog that there had been a lot of ‘nonsense and misinformation’ about the deal and insisted it would now be able to examine its own ‘strategic opportunities’. One of these is a potential deal to outsource some of its advertising to Google – a move Ballmer said would ‘fundamentally undermine Yahoo’s own strategy and long-term viability’ by undermining its competitive position (this is one of the main reasons why he doesn't want to go hostile).

Of course this isn’t necessarily the end of the saga. This could be a clever negotiating ploy by Ballmer to mobilise Yahoo shareholders on his behalf, forcing the board to lower their price expectations (so far so good, if that is the plan). Admittedly the language Ballmer used (‘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’) doesn’t suggest as much – but the problem is that he doesn’t have many other options. To have any hope of catching Google in the online advertising space, Microsoft needed this deal as much as Yahoo did – it’s got to find some way of pushing its services to internet users, so if Yahoo won’t play ball it will have to set its sights on the likes of AOL, Facebook or even MySpace.

And in the meantime, another year will probably go by in which Google extends its online dominance. Even if Ballmer was right not to pay $37-per-share for Yahoo, he’s likely to be feeling almost as gloomy as Jerry Yang today...

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