Microsoft withdraws bid for Yahoo

Software maker walks away after it says it
raised its offer to $46 billion – says economics demanded by Yahoo ‘do
not make sense.’

NEW YORK (CNNMoney.com) — Microsoft Corp.’s pursuit of Yahoo Inc.
ended abruptly Saturday when the world’s largest software maker
withdrew a sweetened $46 billion offer and said it would not make a
hostile bid for the Internet company.

Microsoft said the
breakdown came despite having raised the bid to $33 a share, or $5
billion above what it said was the current value of the offer and a 70%
premium compared to its original offer.

The offer was valued at $31 a share when it was made in January. Yahoo stock closed Friday at $28.67 a share.

“After careful consideration, we believe the economics demanded by Yahoo (YHOO, Fortune 500) do not make sense for us,” said Microsoft (MSFT, Fortune 500) CEO Steve Ballmer.

In
a letter to Yahoo Chief Executive Jerry Yang, Ballmer said that Yahoo
wanted at least another $4 a share, or $5 billion in value, added to
the deal, bringing it to at least $37 a share.

Ballmer also told Yang that taking the offer directly to shareholders would not be “sensible.”

“This
approach would necessarily involve a protracted proxy contest and
eventually an exchange offer,” Ballmer wrote. “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 said he was concerned that a further collaboration between Yahoo and Google (GOOG, Fortune 500) – which he called “the dominant search provider” – would make an acquisition undesirable for several reasons.

Yahoo officials indicated their pleasure with the end of the Microsoft bid.

“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 in expressing that view,” Yahoo chairman
Roy Bostock said.

Yang, in the same statement, called the
Microsoft bid a “distraction” and said that Yahoo will now focus “on
executing the most important transition in our history so that we can
maximize our potential.”

Microsoft: We’ll do it without Yahoo

Microsoft indicated that it will proceed with a Web advertising strategy.

“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,” Ballmer said. “While Yahoo would have
accelerated our strategy, I am confident that we can continue to move
forward toward our goals.”

Both Microsoft and Yahoo have struggled to compete with Google for billions of advertising dollars shifting to the Web.

A
marriage between Microsoft and Yahoo had been widely considered by
analysts as inevitable. “As we have indicated since 2/1, we think MSFT
will eventually acquire YHOO at a price not materially above the value
of its initial offer,” wrote Scott Kessler, an analyst with Standard
& Poor’s, in a report earlier this week.

Microsoft fears that
Google’s acquisition of DoubleClick – the world’s biggest online ad
server company and big player in the increasingly lucrative market for
online display ads – will allow the search giant to seize an even
bigger portion of the ad market as Microsoft’s MSN falls further behind.

Microsoft
made a public offer to buy Yahoo on Jan. 31, two days after the
Internet portal reported weak quarterly earnings and a disappointing
outlook for 2008.

Yahoo was an impressive target. It is one of
the last independent Internet companies with massive scale. In March,
it was the top-ranked site in the United States with 139 million unique
visitors, according to comScore, which tracks Web audiences. Google was
second and Microsoft was third.

What might have been

A Microsoft-Yahoo combo could have offered even greater scale and attracted more advertisers.

None
of that persuaded Yahoo, however. Though the value of the company’s
stock has risen more than 40% since Microsoft made its offer, its board
said the proposal “substantially undervalues” the company.

Throughout
the past three months, Yahoo had said it was not opposed to a merger if
Microsoft offered the right price. But it also sought alternatives.
When no white knights came to the rescue, Yahoo in recent months
pursued other tieups with Time Warner (TWX, Fortune 500) (parent of CNNMoney.com), News Corp. (NWS, Fortune 500) and Google.

But any involvement with Google could raise antitrust issues.

Yahoo’s
two-week test running Google’s search ads caught the attention of the
U.S. Justice Department. Microsoft General Counsel Brad Smith said a
Yahoo-Google collaboration would “consolidate over 90% of the search
advertising market in Google’s hand.”

Sen. Herbert Kohl, D-Wis.,
the chairman of Senate Judiciary Committee’s antitrust panel, said last
month that “should there be moves to make this agreement permanent, we
will examine it closely … to ensure that it does not harm
competition.”

On Saturday, Ballmer struck a generally cordial tone with Yang, even as he criticized Yahoo for rejecting Microsoft’s offer.

“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 wrote. “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,” Ballmer added. “Thank you again for the time we have spent together discussing this.”

Scott Moritz and Yi-Wyn Yen of Fortune contributed to this article.