Microsoft Boo-Hoos Yahoo

But Microsoft isn't going away gladly. For days, the company prepared for the possibility of withdrawal by placing blame on Yahoo. In an interesting power play, Microsoft CEO Steve Ballmer largely blamed a rumored Google-Yahoo search outsourcing deal as a major reason for the offer's withdrawal.

"We regard with particular concern your apparent planning to respond to a hostile bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today," Steve wrote in a letter addressed to Yahoo CEO Jerry Yang.

Rumors spread later this week about a long-term ad/search deal between Google and Yahoo, following early conclusion of a two-week test.

"Your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft's proposal to acquire Yahoo!," wrote Microsoft's CEO.

As widely rumored later in the week, Microsoft was ready to raise its offer:

"In our conversations this week, we conveyed our willingness to raise our offer to $33 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33 offer."

A closer reading of the letter indicates that Yahoo wanted more money ($37 a share). I suspect the talks collapsed more because of money than any Yahoo-Google deal. But it's great FUD.

The letter is a masterpiece of PR damage control. Steve comes across as the aggrieved, injured party, who looked out for the best of Yahoo's shareholders. His speechwriter deserves a raise. Let's not forget that Microsoft initiated this process with an unsolicited bid that Yahoo's board rejected.

Microsoft could have gone to shareholders, and commentary about the merger proposal anticipated such action. But no:

"After giving this week's conversations further thought, 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 and eventually an exchange offer. 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."

Steve doesn't specify what those steps might be. But the accusation is clear enough: The bid withdrawal is the fault of Yahoo's board. It's a nice bit of blame shifting that Microsoft could later use should some shareholders revolt and file lawsuits against the board.

The letter asserts how much Microsoft wanted the deal:

"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. By failing to reach an agreement with us, you and your stockholders have left significant value on the table."

The letter, which I again must call a masterpiece, is really for Yahoo shareholders. It effectively:

• Blames Jerry and his board members for the merger's failure (opportunity become failure is the characterization).
• Puts a higher offer on the table and insinuates that Microsoft could reconsider the offer under the right circumstances.
• Explains the most important circumstances for a deal to take place—cessation of any ad/search deal with Google and quick acceptance of any offer.

Without a proxy fight, Ballmer still has made Microsoft's case to Yahoo shareholders. How will they respond? What happens to Yahoo's stock now? We'll know come Monday. I expect that the bid withdrawal will leave Yahoo in shambles, at least for a while, as shareholders and Wall Street react.

For Microsoft, Steve made the right decision; it's the one I asked him to make two days ago.