Microsoft Walks From Yahoo, But Pressures Continue

Jennifer LeClaire, newsfactor.com Mon May 5, 11:17 AM ET

After months of playing cat and mouse, it appears the Microsoft-Yahoo merger is dead. Microsoft walked away from the Yahoo acquisition over the weekend, and Yahoo's stock is feeling the impact. But is this really the end of the saga?

Microsoft CEO Steve Ballmer said he still believes the proposed acquisition made sense for both companies and the market as a whole. Microsoft's goal in pursuing Yahoo, he said, was to provide greater choice and innovation in the marketplace and create real value for stockholders and employees.

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

Yahoo: Still Not Enough!

The news didn't seem to faze Yahoo. Chairman Roy Bostock responded with the same message he has been sending since Microsoft's initial $44.6 billion bid: It's still not enough. Even with the additional $5 billion offered, Bostock said Yahoo's board and management believe Microsoft's offer undervalues the company.

"Yahoo is profitable, growing and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market," Bostock said. "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."

Bostock pointed out that Yahoo has a refined strategy to drive new volume and yield, has reorganized to focus on its most promising products and services, has invested in innovations to revolutionize display advertising and close the competitive gap in search, and has enhanced expense and resource management for improved profitability.

Yahoo cofounder and CEO Jerry Yang said he is proud of how the Yahoo team came together: "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."

Is it Really Over?

Microsoft may have walked away, but is the struggle really over? Is this just another step in the dance? As Greg Sterling, principal analyst at Sterling Market Intelligence, sees it, Microsoft's decision is not merely a ploy -- but a merger is still not beyond the realm of possibility. What's certain is there is pressure on both Microsoft and Yahoo going forward.

Microsoft is under pressure to beef up its Internet strategy. Kevin Johnson, Microsoft president for platforms and services, said the company is "investing heavily in new tools and Web experiences." Walking away from Yahoo frees up Microsoft to spend its cash on other Internet companies, Sterling said, including AOL or Facebook.

Yahoo returns to the investor pressure and scrutiny it was under before Microsoft's unsolicited bid. Yahoo, Sterling said, could emerge stronger.

"I do think the Microsoft bid galvanized Yahoo in some ways," Sterling said. "Any enemy or adversity helps a company clarify its priorities and accelerate certain types of thinking. Suddenly some of the conservatism that had prevailed at Yahoo before seemed to be cast aside and the company was talking about anything and everything. Now Yahoo must execute."