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Yahoo! - Microsoft walks away
Good news for Google…

By Reuters

Published: Tuesday 06 May 2008

Yahoo! chief Jerry Yang signalled a more open stance towards Microsoft yesterday, saying he had been seeking common ground when the software maker abruptly ended deal talks on Saturday.

Yang told Reuters in an interview that he had "mixed feelings" about the weekend outcome, after investors showed their disappointment over the break-up of negotiations by sending Yahoo! shares down 15 per cent.

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Yang said: "We were negotiating a way to find common ground and then on Saturday they chose to walk away. They [Microsoft] started it and they walked away."

Asked if Yahoo! would still leave a door open for Microsoft to return, Yang said: "If they have anything new to say, we would be open...I am more than willing to listen."

After three months of negotiations, Microsoft CEO Steve Ballmer raised his offer for Yahoo! to $33 per share from an initial $31, for a total deal value of about $47.5bn.

Yang held out for $37 per share, saying that even the sweetened offer did not value Yahoo! properly for its web search advertising technology, its prominence in selling display ads and its lucrative overseas holdings.

But its two largest shareholders independently told The New York Times they would have sold for as little as $34.

Gordon Crawford, portfolio manager for Capital Research Global Investors, the largest Yahoo! shareholder with some 16 per cent of stock, told the newspaper: "I am extremely angry at Jerry Yang and at the so-called independent board."

Some analysts said Yahoo! shares, which dropped $4.3 to end at $24.37 on Monday, could have fallen 30 per cent to closer to $19.18, its price before Microsoft made its bid public on 1 February. But the descent was cushioned by investors who are betting Microsoft will eventually come back to the table.

Todd Dagres, general partner at venture capital fund Spark Capital, said: "This is going to play out over the next several months and there is still a chance Microsoft will buy the company for somewhere around $33 a share."

Now that a deal has fallen apart, Google has emerged as the key beneficiary. Shares in the company rose 2.3 per cent.

Derek Brown, analyst at Cantor Fitzgerald, said: "Google has just kept their foot on the accelerator. Neither Yahoo! nor Microsoft in their current state seems to be a material competitive threat."

Yahoo! is likely to press alternative strategies in coming weeks, including a search advertising partnership with Google and a deal for Time Warner Inc's AOL Internet unit.

A Google deal would boost Yahoo!'s operating performance in the near term but runs the risk of regulatory scrutiny over an alliance between the internet's top two players.

In a letter to Yang over the weekend, Ballmer warned that any deal between Yahoo! and Google would be difficult to unravel and would preclude an agreement with Microsoft.

Yang told Reuters the company would take care to structure any new efforts to "preserve as much (as possible) long-term flexibility for Yahoo!, both operationally and strategically."

On the matter of the Microsoft deal, Yang said in a post on the company's blog on Sunday night: "No one is celebrating about the outcome of these past three months ... and no one should. We live and work in a competitive world and the web is only going to get more competitive. Executing on our strategic plan is what matters most."