Steve Ballmer
Chief Executive
Microsoft Corp.
Dear Steve:
As a Yahoo shareholder, I have reviewed your most recent letter with regard to the unsolicited proposal you made to acquire Yahoo on Jan. 31.
I have carefully considered your unsolicited proposal and have concluded that it is in the best interest of Yahoo shareholders for Microsoft to buy Yahoo.
I understand that our board has been actively and expeditiously exploring strategic alternatives to maximize shareholder value. Frankly, that effort has been a big disappointment to many of us. After hitting $30, Yahoo shares have drifted to $27 and change this week. Despite Yahoo's 305 million unique monthly users, no one else has stepped up with an offer. No one is more disappointed than I am that no bidding war erupted.
At this point, I've given up hope that some white knight will emerge. All we shareholders have heard about is talks with News Corp., now apparently over, and with Time Warner's AOL. (News Corp. is the owner of The Wall Street Journal publisher Dow Jones & Co.) I'm sure you and your Microsoft colleagues are quaking in fear at the competitive threat from a combined Yahoo-AOL. AOL has already dragged down one once great corporation. Why should we be next?
Let's talk about the real threat here: Google. I'm a Google shareholder, too, which is fortunate for me since Google has eaten Yahoo's lunch in search -- yours, too, for that matter. Yahoo's board and top executives are pinning their hopes on growth in search and on display/video advertising. But even if those markets grow, Google has been steadily expanding its lead in search. Now that it owns DoubleClick, it will be a formidable threat in display/video as well.
These businesses depend on scale, but not just on sheer size, which is something people running Yahoo either don't grasp or don't want to talk about. Google's searches are more effective for both searchers and advertisers, which is why it keeps gaining share. Yahoo has 262 million email users, which gives users a reason to return to the site and is surely valuable to Microsoft. But beyond that, there's little to deter Yahoo users from migrating to other sites.
I realize that you recently received a letter from Yahoo CEO Jerry Yang and Chairman Roy Bostock very similar in tone to this one, but reaching the opposite conclusion. Don't listen to them. I'm sure they know their options are running out. I also hear there's been grumbling from people inside Microsoft. Don't listen to them, either. You need to do something with the $37.8 billion in current assets sitting on Microsoft's balance sheet. In fact, you'd get no complaint from me if you made your bid all cash.
So there can be no confusion, let me reiterate that my goal is to maximize shareholder value. I have no desire for a drawn-out hostile bid, and you will generate no goodwill whatsoever if you carry out your threat to lower your offer. You previously offered $31 a share. All of us understand that no one makes their highest bid first, so why don't you tell us what you're really prepared to pay, and we'll call it a deal.
Very truly yours,
James B. Stewart
James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.
By: James B. Stewart
Wall Street Journal; April 9, 2008
