Advertising Provides Key To Microsoft-Yahoo Deal

So Microsoft is back, this time in talks over an unspecified "transaction" with Yahoo.

A couple of weeks ago, I said Yahoo may have blundered its way into a better outcome for its shareholders, and this latest twist strengthens my conviction. With a possible deal with Google still being considered and Microsoft back at the table, much-derided Yahoo is suddenly looking like Cinderella at the ball. Yahoo's management may yet emerge as heroes.

Microsoft maintains that it isn't discussing another takeover bid, though it reserves the right to do so. What might they be talking about?

Speculation has focused on combining Yahoo's and Microsoft's search businesses, which are a distant No. 2 and No. 3, respectively, to Google's. April figures from Nielsen Online, a research firm that tracks Internet usage, put Google's share of the U.S. search market at 62% versus 27% for a combined Yahoo-Microsoft. Surely the trend of ever-shrinking market share hasn't been lost on executives at Yahoo and Microsoft. So combining their search operations makes about as much sense as the Sears-Kmart merger.

The only advantage would be cost savings. Yahoo spends about $1.2 billion a year on "product development," much of that presumably on the search arms race with Google. It's hard to say how much Microsoft spends, but let's assume a comparable figure. Combining the two operations would presumably cut close to $1 billion in costs. I assume Microsoft would buy Yahoo's search operations, with some sort of revenue-sharing arrangement.

But why stop at search? A combined Yahoo-Microsoft still has the edge over Google in display advertising. Kevin Johnson, president of Microsoft's platform and services division, said in a widely circulated memo to employees this past weekend that his aim was to "disrupt" the market in search and "win" in display advertising. He noted that Microsoft's ad revenues had increased 40% compared with declines at Yahoo and Google. This intense competition doesn't yet reflect Google's deployment of recently acquired DoubleClick but suggests an intense campaign ahead.

Display is where Yahoo's sheer numbers are most compelling. What Yahoo has going for it is content and a vast number of unique visitors. Scale is what matters, just as it does for Super Bowl advertising. Scale is Yahoo's most valuable asset.

In the most recent quarter, about 87% of Yahoo's revenue came from advertising. If Microsoft essentially buys all of Yahoo's ad business, both search and display, then it gets nearly all the benefits of a merger. Yahoo would become a pure content company, basically outsourcing its ad business to Microsoft.

There's a deal that starts to make sense. This surely wouldn't be lost on Google, which has concluded a successful search advertising test run with Yahoo, and which would benefit from a display deal as well. In my previous column I called for Yahoo to turn over all its search advertising to Google, but that seems too limited now that Microsoft has upped the ante. Google should also be looking to acquire Yahoo's entire ad business in a cash-and-revenue-sharing deal.

The big question is price, but given the huge potential advantages to both Google and Microsoft, it should be a big number. As a Yahoo shareholder (I also own Google), I say let the bidding war begin.
By: James B. Stewart
Wall Street Journal; May 21, 2008

Icahn, Microsoft merger maven?

Billionaire investor Carl iCahn has a bone to pick with Yahoo's board of directors for not accepting Microsoft's buyout offer.

The notorious shareholder activist Carl Icahn formally announced that he is launching a proxy fight. He has formed a 10-member slate in an effort to unseat Yahoo's current board at the company's annual shareholder meeting on July 3.

Icahn, who stated that he has acquired roughly 59 million shares of Yahoo, has also sought antitrust clearance from the Federal Trade Commission to acquire up to another $2.5 billion in Yahoo shares.

Icahn is leaning on such high-profile tech names as Mark Cuban in his efforts to unseat Yahoo's current board at its annual shareholder meeting and to pave the way for a Microsoft-Yahoo merger. Cuban, owner of the Dallas Mavericks and chairman of HDNet, ironically sold Broadcast.com to Yahoo for $5.04 billion in 1999.

Icahn has been making his mark in the tech industry of late, most notably in the last year or so, with his actions regarding Motorola and BEA Systems. Over the past 13 years, he's logged more wins than losses in his proxy fights, according to FactSet SharkWatch.

Microsoft earlier this month walked away from its multibillion-dollar bid to buy Yahoo when the two companies failed to come to agreement over the purchase price.

Some CNET News.com readers were suspicious of Icahn's motives.

"Icahn specializes in what's best for him," one reader wrote in the TalkBack forum. "Is he in this for the long haul? Or just the short-term profit?"

On the other side of the merger manners meter, Hewlett-Packard proved that friendly blockbuster deals could still be done today.

HP plans to acquire computer services firm EDS for $13.9 billion in a deal intended to boost HP's services revenue. HP expects that the addition of EDS will more than double HP's services revenue of $16.6 billion in fiscal 2007.

But the sheer size of the deal is more than a bit daunting. The deal represents the combination of the largest number of people that the IT services sector has seen, Gartner analyst Ben Pring said, and HP faces serious challenges when it comes to integrating two vastly different companies. The track record of deals like this is "pretty spotty," Pring said, and IBM's purchase of PricewaterhouseCoopers demonstrated that the transition can be tough.

In other merger news, CBS has agreed to acquire CNET Networks, the publisher of News.com, in a deal valued at $1.8 billion. The acquisition will make CBS one of the 10 most popular Internet companies in the United States, with a combined 54 million unique users per month and about 200 million users worldwide, the companies said.

Google wants to make friends
Google has unveiled a preview of Friend Connect, a way to add social features to a Web site without programming. Meanwhile, Facebook has announced its own Facebook Connect, in which members will be able to use their Facebook identities across the Web--profile photos, names, photos, friends, groups, events, and other information. Facebook profile content, for example, could appear on other social sites, and Facebook event listings could theoretically connect with external event and invitation services.

It's a big move for Facebook. Until this point, the social network has had a reputation for keeping its cards close to its chest--even banning the account of popular blogger Robert Scoble when he used a script to export his Facebook contact list to Plaxo. But Facebook has a representative in the Data Portability Workgroup, and executives have said Facebook has wanted to bring its information outside the site eventually.

Google Friend Connect, on the other hand, employs several more-or-less standard networking technologies--OpenSocial as a foundation for richer Web applications; OpenID to handle login chores; and OAuth to let users approve the grafting of new branches onto their existing social networks.

It's yet another option in the complicated and fast-changing set of alliances and standards efforts in the social-networking domain. When Friend Connect was first announced, Google engineers explained that it would take advantage of other social-networking sites' APIs to enrich the program--including Facebook's.

However, a post on Facebook's developer blog explains that the social network has suspended Google Friend Connect's access to its API, citing a violation of its internal terms of service. Facebook contends that while its users would manually opt in to Friend Connect, they would not have control over the third-party sites that would then use Friend Connect through Google's API.

Meanwhile, Comcast is adding a social dimension to its services through the acquisition of Plaxo. Terms of the deal were not disclosed, but the purchase price is thought to be in the $150 million to $170 million range. The acquisition is a big win for Plaxo, whose Pulse social-networking service, with 1.5 million active monthly users, has been overshadowed by the likes of Facebook and MySpace.

Web surf's up on street, stars
Google is gathering 3D data along with the photographs it takes for its online Street View service, a potential boon for those of us who fantasize about flying like Superman through urban landscapes--at least virtually.

"The imaging technology includes lasers that collect 3D geometry data," the company said in a statement. However, for now, at least, the 3D information is just experimental, Google said.

Savvy observers, looking at Flickr pictures of Google Street View cars gathering images in Milan, had identified the 3D laser scanners in April. At the time, Google didn't comment, but it now has confirmed the scanners, as well as the expansion of Google Street View to Europe.

Google Maps now can also show real-estate listings, presenting pushpins that show houses for sale. To show real-estate results, click "Show search options," then select "Real Estate" from the drop-down list. The Web site then shows a list of properties for sale on the left tied to pushpins on the map on the right.

Search results can be refined by specifying price range or number of bedrooms and bathrooms. In addition, there's a text mode that will be more familiar to the classified-ad crowd. (Huh? Text mode for a mapping site? There's still a small map visible.)

But soon you will be seeing less from Google's Street View; the company has begun testing face-blurring technology, responding to privacy concerns from the search giant's all-seeing digital-camera eye. The technology uses a computer algorithm to scour Google's image database for faces, then blurs them, said John Hanke, director of Google Earth and Google Maps.

He likened the issues some have with Street View to the ones that took place when Google introduced aerial views to Google Maps. It took time for the public, regulators, and Google to get comfortable with the feature, but "it needs that debate. We see that and try to let it play out."

Meanwhile, Microsoft launched its WorldWide Telescope, a free Web-based program that allows Web surfers to explore galaxies, star systems, and distant planets. The program, which was developed by Microsoft's research arm, weds images from the Hubble Space Telescope, the Chandra X-Ray Observatory Center, the Sloan Digital Sky Survey, and others.

Microsoft said WorldWide Telescope will be made available for free as a tribute to Jim Gray, a Microsoft researcher who disappeared off the California coast while sailing last year.


By Steven Musil
Staff Writer, CNET News.com; May 16, 2008

Jerry Yang's Scorched Earth

Congratulations to Steve Ballmer. Not many CEOs would have the nerve – humility, cold-bloodedness, whatever – to float a gotta-have takeover offer, then back away over the difference between $33 and $37 a share.

Not many CEOs would have been willing nakedly to advertise strategic vulnerability and faulty execution vis-a-vis a rival like Google, then fail to consummate the deal marketed to investors as the remedy for that vulnerability and faulty execution.

Even more so because of Mr. Ballmer's Murdochian approach: He came at Yahoo with a rich 62% premium designed to foreclose a rival suitor and confront the Yahoo board with a choice of accepting Microsoft's terms or serving up a big ugly stock price drop to Yahoo's suffering shareholders. By laying such a dramatic premium on the table, he also sent a message to his own Microsoft shareholders that said: "This is the only way I see forward."

But Mr. Ballmer didn't count on Jerry Yang, whose idea of what his company was worth became inflated by the perception that Microsoft needed it so much. When Mr. Yang said Microsoft's offer "undervalued" Yahoo, he meant it underestimated Yahoo's value to Microsoft, not to anybody else.

In a fashion, he outsmarted not only Mr. Ballmer but his own Yahoo shareholders and board. Having discovered how much Yahoo was worth to Redmond (and no one else), he set about destroying that unique value by ceding Yahoo's position in search to Google through an outsourcing deal.

All this so Jerry Yang can fulfill his dream of having an independent Yahoo whose halls he can continue to walk as the revered "founder."

Luckily for him, the media are too busy obsessing about the severance dished out to various Wall Street executives to make him the new poster boy for high-handed, unaccountable CEOs.

For his part, Mr. Ballmer's retreat was a rarer sort of act. Yahoo's value to Microsoft, after all, was as a weapon to impede Google's assault on Microsoft's core business, for which Microsoft could afford to pay almost any price.

A Yahoo acquisition would have allowed Microsoft to buy a position in Web eyeballs with which to attack Google's margins if not Google's market share. In turn, Google would have to think twice about throwing money regardless of potential return (as Microsoft itself was known to do) at undermining a rival's business model.

It was a plausible strategy. Then again, Microsoft might have ended up spending years and billions to build a Maginot Line.

Post-Yahoo, Mr. Ballmer says his company's counter-Google strategy remains intact; it will just be slower-going without Yahoo. But Microsoft here is perhaps showing too little imagination – or throwing up a smokescreen.

The alternative? The bravest would be to spin off Windows. Vista, its latest output, was not a triumph, even if Microsoft claims to be content with sales of the new operating system sold so far. InfoWorld, a magazine of corporate technology managers, has collected thousands of online signatures begging Microsoft to delay retiring its previous Windows version, XP, without which they'll be forced to upgrade and buy expensive new computers they don't want.

A liberated Windows unit could concentrate on developing the more streamlined and diverse operating system products the market wants (some of which could be supported by advertising), and it would still be a fabulous business for Microsoft shareholders. Meanwhile, the other Microsoft could devote itself wholeheartedly to building application businesses for the Web age, even an Office-based network for delivering ads and other services in competition with Google. With its $26 billion cash pile, Microsoft could set itself up as the host for an array of cutting-edge Web services being created by new start-ups, rather than trying to outgoogle Google in the search market.

Moral victories don't count for much with the stock market, but let's give Mr. Ballmer his moral victory. Big Yahoo investors like Capital Research's Gordon Crawford are slinging spitballs at Mr. Yang. Mr. Yang, in legal jeopardy, is spinning a tale about how Microsoft was the one that botched a deal. Yahoo's future as an "independent" company would seem to mean vassalhood to Google.

But "I told you so" doesn't brace up the Windows/Office fortress or throw a banana peel under an advancing Google. More interesting than Yahoo's fade to irrelevance (see you in Delaware Chancery Court!) will be Mr. Ballmer's Plan B.


By: Holman Jenkins, Jr.
Wall Street Journal; May 7, 2008

The War for the Web

Microsoft was smart to walk away (for now) from its $44 billion bid for Yahoo. It's never good to overpay. But the software giant – whose stock has flatlined for eight years – was onto the right strategy in looking to the Web for growth.

Can't Microsoft build something on its own? Why the rush to pay billions for Yahoo? The simple (and wrong) answer was that adding Yahoo's 20% Web search market share to Microsoft's 10% meant that it could compete against Google's 60% share. Technology changes too fast for that to make sense except on paper. Programs run anywhere these days – on your desktop computer, on servers in data centers, on your iPod, cellphone, GPS, video game console, digital camera and on and on. It's not just about beating Google at search, it's about tying all these devices together in a new end-to-end computing framework.

With the Microsoft/Yahoo deal breakdown, everyone assumes Google walks away with the prize. Not so fast. This contest is just starting. For Microsoft or Google or anyone else to win, they need four key elements of an end-to-end strategy:

- The Cloud. The desktop computer isn't going away. But as bandwidth speeds increase, more and more computing can be done in the network of computers sitting in data centers – aka the "cloud."

There, search results can be calculated, companies' payrolls processed, even the complex graphics for video games can be drawn. But it's not cheap. These clouds are multibillion-dollar investments. Google spent $842 million in the last three months on servers, data centers and fiber optics.

Today, there are several major clouds: Google, Yahoo, Microsoft, Amazon and smaller players IBM and Sun. Can there be more? Sure, but it would require a business model that could not only pay for it, but could rip it out every few years and modernize it. Google's $20 billion Web advertising business gives it the cash flow to do so. Advantage Google.

- The Edge. The cloud is nothing without devices, browsers and users to feed it. Book buyers are basically paying for Amazon's data centers. Yahoo is a favorite for finance and sports enthusiasts, who pay for its data centers. Google worked its way into the toolbars of Firefox, and even Microsoft's browser.

And Microsoft? It was stripped of its ability to control Windows desktop real estate during the late '90s Netscape feud. Accused of using its overwhelmingly popular Windows operating system to unfairly dominate other new markets, Microsoft settled the dispute with the Justice Department in 2001.

Now Microsoft scrambles for other advantages. One lies in smart mobile devices, which is the fastest-growing location to launch search requests. Microsoft software runs on about 20% of smart phones in the U.S.

Don't underestimate the value of Microsoft's other market stronghold, its X-Box video game platform. Now you know why Google is scrambling to plant a flag in the cellphone business with its Android technology and bids for wireless spectrum. So far, advantage Microsoft.

- Speed. Once you build the cloud, it's all about network operations. Whoever can deliver search results faster, wins. Users only realize this subconsciously, but it's true: Google's dominant share is as much about speed as it is for relevant results. Compare it to Microsoft or Yahoo and you'll see. Google built data centers next to waterfalls so electricity could be cheap enough to help it win the speed war.

New cloud applications appear every day – backing up files, managing your money, editing photos, running the back end of multiplayer games like World of Warcraft. Now corporate America is evaluating moving its accounting, scheduling, order management and the like into the cloud, and speed will be a top priority. Advantage Google.

- Platform. Yahoo's mistake was relying on expensive workers to update Web pages and sell ads, and especially to run Yahoo Finance, Sports, HotJobs and Travel. Google hates using people for these tasks. The company may love programmers and probably customers as well, but it tries to put absolutely no one in between them. Google's genius was to automate all its Web page creation and to have a market set prices for ads.

But even though Google has more than 10,000 employees, the company doesn't have a lock on brain power – especially since its stock is not climbing as fast as it once did, and with young coders setting their eyes on the next big startup.

Having a fast cloud is nothing if you keep it closed. The trick is to open it up as a platform for every new business idea to run on, charging appropriate fees as necessary.

Microsoft knows this. I sat through a keynote speech by Bill Gates maybe 15 years ago. Asked why Microsoft makes all the money in the software business, he snapped: We don't make all the money. Actually, we only make money because we are a platform for others to use our software to make money themselves.

Only by opening up system internals to thousands of hungry developers can anyone truly create an operating system in the cloud. Google has made open announcements but is still quite closed. Advantage Microsoft.

So with the failure of the Yahoo bid, where does that leave Microsoft? The answer is found in Microsoft's mantra: embrace, extend and innovate. Made famous in a 1994 Microsoft executive memo, this mantra has worked again and again: Windows dominated Apple for decades, the Excel spreadsheet bypassed Lotus 1-2-3, and the Internet Explorer browser destroyed Netscape.

Of course, Microsoft could come back and bid again for Yahoo at $25. But there is a go-it-alone strategy: Embrace the Web search and advertising business. Maybe even do what Craigslist did to newspaper want ads, devaluing search advertising by offering the same thing for free, or really cheap.

The trick is to then extend and innovate. Run code that figures out what users are looking for, not just on servers, but on X-Boxes, Zune music devices and even Apple iPhones. Some of the new markets aren't even twinkles in developers' eyes.

At the moment, neither Google nor Microsoft, or anyone else, has nailed down cloud, edge, speed and platform. All the loosely coupled electronic devices in our pockets need to work together seamlessly with Facebook applications in the cloud. Who will do it? Unclear.

The continuing battle between Microsoft and Google will mean fierce competition – adding features, building data centers, cutting deals and spending money on speed and customer convenience. That's the way to move technology forward. It's great to see Microsoft with some fight left in it. Not only hasn't the Internet yet matured, it's becoming an ever-more high stakes game.

By: Andy Kessler
Wall Street Journal; May 6, 2008

Yahoo Holders Turn Up Heat After Microsoft Deal Talks Fail

SAN FRANCISCO -- Yahoo Inc. Chief Executive Jerry Yang Monday had to tangle with some big shareholders who were displeased that he didn't reach a deal to sell his company to Microsoft Corp. at a sweetened price.

"I'm extremely disappointed in Jerry Yang," said Gordon Crawford, a portfolio manager at Capital Research Global Investors, which owns over 6% of Yahoo's shares. "I think he overplayed a weak hand. And I'm even more disappointed in the independent directors who were not responsive to the needs of independent shareholders."

At issue was Yahoo's stance in negotiations with Microsoft Saturday that the company was worth $37 per share, while Microsoft said it was prepared to offer $33. Some of Yahoo's major shareholders had by late last week signaled to Yahoo that they were open to a deal around $33 or $34 per share, according to people familiar with the matter.

"It's evident that most shareholders would have been perfectly happy with a transaction in the $34 range," said Mr. Crawford of Capital Research Global Investors, a division of Capital Research & Management Co. The parent concern in total owned over 16% of Yahoo's shares according to the latest available regulatory filings, making it Yahoo's largest shareholder.

With Microsoft's withdrawal of its offer Saturday, and a sharp slide in Yahoo shares Monday, some investors are asking why Yahoo didn't work harder to bridge the price gap with Microsoft. Any investor dissatisfaction could potentially feed into calls to unseat Yahoo's board at its next annual meeting or efforts to press Yahoo's directors to go back to Microsoft to try to strike a deal. Yahoo late Monday announced it would hold its annual shareholder meeting on July 3, setting a May 15 deadline to receive any new nominations for Yahoo directors.

A manager at another major shareholder said the firm was "comfortable with Microsoft's price," and had communicated to Yahoo last week that it would accept a deal in the approximate range of $33 or $34 per share.

A manager at a third major Yahoo shareholder said some investors were pressing Yahoo to "reopen the dialogue" with Microsoft about possible deals. "The shareholders are pretty irate," the manager said.

Yahoo's Mr. Yang and the company's chairman Monday defended Yahoo's actions. "Listening to shareholders is very important but you'll get lots of points of view," said Yahoo Chairman Roy Bostock in a joint interview with Mr. Yang Monday. "In the final analysis the independent directors of the board had to make a determination of what our position would be when we put the first price on the table," he added, saying that Yahoo's board had not named any price before Saturday.

"We said, considering all of these hard data, what we should do is say we think a fair value for the company is $37. It was not a take-it-or-leave it statement," Mr. Bostock said. He said Microsoft did not respond to that price other than to withdraw its offer.

One person familiar with the matter said Yahoo's board saw $37 as a starting point in what was expected to be a negotiation. Some board members may have been prepared to accept a lower price from Microsoft -- perhaps as low as $34 -- if Microsoft had continued negotiating, this person says.

Some of the major Yahoo shareholders were upset that Mr. Yang and cofounder David Filo were the ones who represented Yahoo in the discussions with Microsoft on Saturday in Seattle, prior to Microsoft's withdrawal of its offer. Those shareholders believe the two were biased against selling the company they co-founded in 1995.

Mr. Yang in the interview disputed the idea that Yahoo didn't want to sell to Microsoft. "There should be no question about our willingness" to sell to Microsoft, he said, speaking of himself and Mr. Filo. "We as a company and I personally have always been open to a deal with Microsoft and I hope that the last few days it was clear that we have shown we're willing to do a deal with Microsoft but that we couldn't get to an agreement on price."

As expected, Yahoo's stock took a pummeling in the stock market Monday, falling $4.20, or 14.7%, to $24.47. Analysts said the shares, which traded at $19.18 on Jan. 31 prior to Microsoft's initial $31 per share offer, were supported from falling to the same level by the possibility that Microsoft could revive its Yahoo pursuit, and that Yahoo was poised to announce a search advertising pact with Google. While a deal wasn't finalized as of Monday afternoon, Yahoo and Google were vetting a potential agreement with antitrust regulators, according to a person close to Google.

Mr. Yang said he was taking Mr. Ballmer's letter withdrawing the Microsoft offer "at face value for what it is." He acknowledged facing pressure now to deliver on Yahoo's plans for its business. "There is no celebrating here," he said. "We have a lot of work ahead of us."

By: Kevin Delaney
Wall Street Journal; May 6, 2008

Microsoft Ends Pursuit of Yahoo, Reassesses Its Online Options

Software Maker Cites Divide Over Price; The Google Factor

Yahoo Inc. Chief Executive Jerry Yang didn't really want Microsoft Corp. to buy his company. By Saturday, Microsoft Chief CEO Steve Ballmer didn't want that either, leaving both technology companies facing fundamental questions about their futures.

The failed courtship leaves Microsoft with limited options for achieving its strategic goal of expanding its presence online and may not close the door to another bid for Yahoo down the road.

In a letter to Mr. Yang Saturday in which he withdrew Microsoft's takeover offer, Mr. Ballmer cited a divide over price, saying Microsoft had been willing to raise its offer for Yahoo to $33 a share, or about $47.5 billion, and Yahoo demanded at least $4 a share more.

But some people close to the matter believe that the two sides could have found a middle ground if negotiations continued, particularly since some of Yahoo's major shareholders had signaled late last week they would support a takeover by Microsoft at a price in the range of $34 or $35 a share.

Microsoft's battle for Yahoo represented part of the scramble by technology and media giants to capture the flood of advertising dollars moving online and to block Web giant Google Inc. from extending its dominance in online-search advertising.

Mr. Ballmer had said in recent days that he was confident Microsoft could go it alone to build a competitive online-advertising business without buying Yahoo. At the same time, he had faced skepticism from within Microsoft about its ability to pull off such a large acquisition at a time when the software maker faces many other challenges. Mr. Ballmer himself had shown hints of such doubts in recent weeks, say people familiar with the matter.

He also squared off against a Yahoo that was increasingly confident that it was worth much more than Microsoft had been offering. While Mr. Yang and Yahoo directors preferred from the start that the Internet company stay independent, they were particularly emboldened by the success of a test late last month to carry search advertising from Google. "There was just nothing that showed any sign of this potentially coming on track," said one person familiar with Microsoft's thinking, who questioned Yahoo's stated willingness to sell the company to Microsoft at the right price, as it had said publicly.

Having averted a sale to Microsoft, Mr. Yang probably will have to placate shareholders who had been hoping for a deal. Analysts estimate Yahoo shares will fall to between $20 and $25 a share without Microsoft's bid to prop them up, down from their 4 p.m. close of $28.67 Friday in Nasdaq StockMarket trading.

Yahoo is hoping to seal a broader search-ad pact with Google in the coming days, but antitrust experts warn that will surely encounter intense regulatory scrutiny. And the company, which has struggled to focus and execute its plans in recent years, faces deep skepticism from investors about the financial targets it has released for 2009 and 2010 to justify its value on its own.

Microsoft's withdrawal diminishes prospects that Google will face a dramatically bulked up competitor in Web search and online advertising anytime soon. Google's runaway success at the expense of Yahoo and Microsoft in recent years was one major driver of Mr. Ballmer's effort to close a deal. Now, Google is likely to handle at least some of Yahoo's search-advertising business, and Microsoft is heading back to the drawing board to consider its own options. "It's disappointing because one would hope there would be a more balanced marketplace," said Sir Martin Sorrell, chief executive of advertising company WPP Group PLC. "Google's dominance continues."

Microsoft could still eventually end up buying Yahoo. If Yahoo's share price plummets, shareholders could intensify efforts to pressure Yahoo's board to agree to a deal at a lower price. Already several shareholders have sued the company over its rejection of the Microsoft bid.

Mr. Ballmer's letter Saturday appeared intentionally crafted to spell out to Yahoo shareholders how hard Microsoft worked - and the amount it boosted its bid-to entice Yahoo's board to enter a deal. That is a typical tactic for a would-be acquirer hoping to spur shareholder activism and one followed by Oracle Corp. last year in its bid for BEA Systems Inc. After BEA rejected Oracle's offer, Oracle withdrew its bid and its executives took great pains to spell out the effort they made to persuade BEA to enter a deal. Shareholder pressure early this year forced BEA into Oracle's arms.

The takeover standoff that began with Microsoft's unsolicited $31-a-share offer for Yahoo on Jan. 31 finally came to a head Saturday morning in a meeting between Mr. Ballmer, Microsoft Platforms and Services Division President Kevin Johnson, Mr. Yang and Yahoo co-founder David Filo at the airport in Seattle, say people familiar with the matter.

Messrs. Yang and Filo said that Yahoo directors were open to a deal at $37 11 share, and that the two founders would accept that sum as well, despite their personal desire for $38 a share, these people say. "They were saying, this is as low as we can go. There was no indication they were coming off that number," a person close to Microsoft said.

In Seattle, the two sides discussed price and strategy for several hours and Messrs. Yang and Filo returned to California expecting Microsoft might counter with another offer, according to one of the people familiar with the matter.

In a subsequent telephone conversation with Mr. Ballmer, the Microsoft CEO told Mr. Yang that Microsoft was ending its pursuit of Yahoo. Mr. Ballmer sent his letter to Mr. Yang around 4 p.m. Pacific time Saturday officially withdrawing Microsoft's offer. After hearing Messr.s. Yang and Filo's position on Saturday, Microsoft concluded that the Yahoo founders didn't really want to do a deal, according to people close to the. software maker.

People close to Yahoo dispute the assertion that the Internet company wasn't prepared to continue negotiating on price. Yahoo believed that its shareholders weren't prepared to accept a deal in the price range Microsoft was offering, people close the company say.

Though Microsoft never let go of the threat of a hostile deal, Mr. Ballmer ultimately determined that such a course would have been too destructive. Even if it ultimately won shareholder support for a hostile bid, Microsoft would likely have run into trouble with regulators, its advisers warned.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer," Mr. Ballmer said in a Microsoft news release. "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," he added.

Yahoo Chairman Roy Bostock responded in a press release, by saying, "From the beginning of this process, 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 joined us in expressing that view."

One person familiar with the matter said that the $37 a share Mr. Yang cited to Mr. Ballmer was based on the company's calculation of its value-particularly in light of alternatives such as a Google ad deal-and •not what its large shareholders were demanding. Major Yahoo shareholders had signaled by late last week that they were open to a deal around $34 or $35 per share and were optimistic that the price gap with Microsoft could be bridged, according to people familiar with the matter.

Some people close to the situation believe Microsoft would likely have won a hostile takeover battle at $33 per share. But Mr. Ballmer in his Saturday letter to Mr. Yang cited that potential Google deal as a reason that Microsoft decided not to go hostile. "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," he wrote.
Mr. Ballmer said this was because such a deal would undermine Yahoo's online advertising sales strategy and pose regulatory and legal problems Microsoft wouldn't want to inherit.

A person familiar with Microsoft's thinking said that enhanced employee severance benefits Yahoo instituted in February in case of a change of control represented a cost that Microsoft was also reluctant to bear. Other concerns within Microsoft may have also influenced Mr. Ballmer's thinking. The Yahoo bid was driven by a small group of executives from Microsoft's online group. That group had planned for the bid process to play out fairly quickly with Yahoo entering a friendly deal.

But as time dragged on, other Microsoft executives, including some in the group over seeing Office software, ex pressed their opposition to th deal, say people familiar wit the situation. Also, concer within the company grew ove the challenge of integrating Yahoo's roughly 14,000 staff an various online services, the say. Whether these concerns affected Mr. Ballmer is hard to tell but people close to mm say he started to raise more question about the deal to his lieutenants.

Internal confusion over Mr. Ballmer's plans was rife in March at a three-day meeting of Microsoft's 150 top executives in upstate Washington. Despite exhaustive presntations on the future plans of each Microsoft business group, Yahoo was hardly mentioned. Only on the last day
did Mr. Ballmer mention the bid, in response to a question. He said few words on the topic, leadg some executives to believe was distancing himself from the deal.

As a result, Microsoft executives were surprised when Mr. Ballmer on April 5 sent a letter to Yahoo directors threatening a hostile approach if they didn't reach a friendly deal by April 26. That spurred Yahoo executives and an entourage of ankers and advisers from both sides to meet with Microsoft on April 15 at a Portland, Ore., law firm for what one attendee described as an "information-sharing session about operational isses, strategy and other issues." presentation from Yahoo included a slide that said Microsoft's offer "significantly undervalues" Yahoo.

Late into the meeting Mr. Ballmer addressed the elephant in the room: "Where are we on price?" he asked Mr. Yang, according to two people who were present. Responding to Mr. Ballmer's question, Mr. Yang repeated that the original offer of $31 a share "substantially" undervalued the Internet company. Mr. Ballmer again asked for a firm price, and Mr. Yang said he didn't have a number.

After flying back to New York on the redeye from Portland, Microsoft's advisers call with their counterparts at Yahoo to address the price issue.

During the April 18 call, Goldman Sachs banker Gene Sykes, one of Yahoo's lead bankers, said that at $40 a share the Internet company would be open to a friendly deal. Yahoo's advisers added that below that threshold there would be likely be a lot of debate among Yahoo directors, stressing that the board wasn't specifically asking for $40 at that point, say people familiar with the matter.

Microsoft and its advisers believed that by asking Yahoo for a price they were sending a clear signal that they were willing to pay more than the original bid of $31 a share. But they viewed an asking price of $40 a share as an unrealistic starting point.

For more than a week afterward, there was silence between the two camps. On Saturday, the deadline Mr. Ballmer had set came and went without any movement.

On the following Tuesday, April 29, Mr. Yang called Mr. Ballmer and told him Yahoo might be open to a deal below $40. He described $40 as the "bankers' view," not the board's, according to two people close to Microsoft. Yahoo Chairman Roy Bostock also called Mr. Ballmer and, along with Mr. Yang, urged the Microsoft 'CEO to sit down with Yahoo to kick-start discussions.

On Wednesday, Mr. Ballmer arid Mr. Yang met at Yahoo's law firm in Palo Alto, Calif., the people familiar with the matter say. At the meeting Mr. Yang signaled that Yahoo could accept less than $40 a share.

People close to Yahoo said that Microsoft indicated at Wednesday's meeting it could raise its bid per share a "couple" or a "few" dollars. But Yahoo learned that Microsoft was willing to make a specific offer of $33 a share only in Mr. Ballmer's letter to Mr. Yang Saturday these people said. "We did not know what the offer was," said one person close to Yahoo.

People close to Microsoft say they had made it very clear to Yahoo by the end of last week that they were prepared to offer $33, and that at that price the software maker was "near the end of the rope." On Friday, Microsoft general counsel Brad Smith called Ron Olson, a lawyer for Yahoo's board, and told him Microsoft was prepared to pay $33, according to people familiar with the matter.

During their talks last week, Microsoft and Yahoo at least briefly discussed the possibility of Microsoft's buying just Yahoo's Web-search business alone, say people familiar with the matter, though they never reached an agreement on that either .. One person involved in the negotiations described the search-business talks as a "sideshow."

While Microsoft could eventually pursue Yahoo again, people close to the two sides said they didn't believe Saturday's withdrawal was a negotiating tactic designed to pressure Yahoo to accept a lower offer. Yahoo will now likely face pressure from its investors to justify why it couldn't reach a deal in the range of $33.

In addition to the Google negotiations, Yahoo has also been in discussions to merge with Time Warner Inc.'s AOL Internet unit, under an arrangement in which Time Warner would hold a roughly 20% stake in Yahoo, people familiar with the matter said. But Microsoft's withdrawal of its Yahoo bid could shake the AOL discussions off course. It is possible, for example, that Microsoft will become a suitor for AOL, say people familiar with the matter.

Microsoft's next course of action, say people familiar with the company, will likely be to try to form a tie-up with another Internet company that could pull more consumers and advertisers to its Internet services such as Web search.

In an interview on Thursday Mr. Ballmer noted that few Internet companies have the size that Microsoft would need to immediately get a boost to its business and market share in Internet advertising. Among them, he listed Facebook Inc., AOL and MySpace, the social-networking service owned by News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.

By: Kevin Delaney, Matthew Karnitschnig, & Robert Guth
Wall Street Journal; May 5, 2008

Yahoo-Google Plan Advances

Yahoo Inc. moved closer to outsourcing its search advertising to Google Inc. after an initial test of the system yielded what the two firms deemed positive results, people familiar with the matter said.

A broader partnership between the companies is now increasingly likely, the people said. Yahoo and Google said last week that they would undertake the test to evaluate the revenue potential of a broader search-ad outsourcing arrangement.

A deal might increase Yahoo’s cash flow by more than $1 billion a year, according to Citigroup Global Markets analyst Mark Mahaney.

But a partnership also might serve as needed leverage for Yahoo as it tries to ward off an unwelcome $44.6 billion bid from Microsoft Corp., of Redmond, Wash. Some view the potential combination as gamesmanship, particularly in light of antitrust concerns of a Google-Yahoo linkup.

A broad partnership between Google, based in Mountain View, Calif., and Yahoo could complicate Microsoft efforts but doesn’t derail it immediately. Yahoo could simply pull out of the partnership should it agree to a takeover by Microsoft.

Nevertheless, a deal with Google might make it easier for Yahoo, of Sunnyvale, Calif., to do a separate deal it has been deliberating with Time Warner Inc’s AOL. Yahoo has been in talks with New York-based Time Warner about merging with AOL. Time Warner would receive a stake of about 20% in the merged entity in return.

By: Matthew Karnitshnig
Wall Street Journal; April 17, 2008

Microsoft Remains Favorite In Crowded Battle for Yahoo

Shift in Web Ads Drives Deal Pursuit; Board Meets Today

Yahoo Inc.'s directors meet Friday to discuss alternatives to a Microsoft Corp. takeover, with many insiders still seeing a Microsoft deal - without the participation of News Corp. - as the most likely outcome.

Behind the battle over Yahoo is a scramble by Internet and media giants to capture the flood of advertising dollars moving online and block Google Inc. from extending its Web-search-ad domination.

Aside from Microsoft's solo bid Yahoo's directors will likely discuss a plan under which Time Warner Inc. would fold its AOL unit into Yahoo.Another option for Yahoo is a joint deal with Microsoft and Rupert Murdoch's News Corp., owner of The Wall Street Journal.

Microsoft and News Corp. talked about options involving Yahoo as early as last year, people familiar with the talks said. Now, News Corp. is discussing joining forces with Yahoo and Microsoft to combine News Corp's MySpace, Microsoft's MSN and Yahoo into a separate company, people familiar with the talks said.

But people close to Microsoft discounted the likelihood that it would bring News Corp. into a Yahoo deal. Meanwhile, the potential AOL-Yahoo deal has encountered skepticism from some major Yahoo shareholders, according to people familiar with the investor's thinking.

At the least, the jockeying could leave Yahoo with greater leverage to extract a better price from Microsoft. Yahoo shares rose 82 cents, or 2.95%, to $28.59 in 4 p.m. Nasdaq trading Thursday, as investors welcomed the apparent emergence of alternatives.

Many analysts and investors say Microsoft could probably complete the deal if it sweetened the unsolicited cash-and-stock offer it extended to Yahoo on Jan. 31. That offer, originally valued at $31 a share, or $44.6 billion, was worth $29.34 a share, or $42.2 billion, based on Microsof's share price Thursday. A central question is whether Microsoft is willing to raise its bid.

Yahoo's directors aren't expected to make any big decision Friday about their direction. One person familiar with the matter said Yahoo's options are likely to come to a head next week.

Among the players battling over Yahoo, there's a common assumption: Major brand advertisers are gearing up to move big chunks of money from traditional ads including TV commercials and glossy magazine spreads to online outlets such as video-sharing services and Web sites for women. Although online ads garnered only an estimated 7% of total U.S. advertising dollars last year, Internet companies believe the percentage will increase sharply as Americans ratchet up their daily use of the Web and advertisers gain confidence in the medium.

Google handily won the last phase of online competition focused on ads tied to Web searches. Those ads account for roughly 40% of the U.S. online ad market. But Google and others have turned their sights to display advertising, such as banner ads and video ads, where they expect the next phase of growth to kick in. Such ads currently account for about 30% of U.S. Internet ad dollars.

The Internet's old-guard portals-Yahoo, MSN and AOL have all lost share of the U.S. online-advertising market since 2004, according to estimates from eMarketer Inc. Google's share, driven by its domination 'of search advertising, has jumped at their expense to 28.4% last year from 13.1% in 2004. Looking for growth, the old guard has accelerated efforts to sell ads on partner sites in exchange for commissions, using ad platform systems they have bought and built.

Google's focus on display advertising is taking shape. It recently closed its acquisition of Internet ad-services company DoubleClick Inc. and is trying to take advantage of the popularity of its You Tube video site.

Yahoo is an attractive partner or takeover target because it has the most U.S. visitors, with 137 million in February, according to research firm comScore , Inc. Google, Microsoft, AOL, and News Corp.'s Fox Interactive Media Internet unit follow in the second through fifth places.

Whether called "portals" or "social networks," sites such as Yahoo, MSN, AOL and News Corp.'s MySpace are points of entry to the Internet for consumers. Pooling their resources could bring economies of scale and better attract advertisers. Microsoft's unsolicited pursuit of Yahoo is forcing other players to review their tie-up strategies.

In a Saturday letter to Yahoo director,s, Microsoft Chief Executive Steve Ballmer threatened to go hostile in three weeks if Yahoo didn't agree to a friendly deal, implying that Microsoft wou drop the price in that case. Some major Yahoo investors who believe Yahoo is worth more than Microsoft original $31-a-share offer say the threat to lower the price was counterproductive, giving Yahoo more opportunity to find viable alternatives.

People involved in the negotiations described an unusual level of uncertainty on everyone's part about what is real and what may be smoke and mirrors. It remains unclear even to the participants whether some of them are being used as stalking horses. .

The scenario that News Corp. and Microsoft are discussing would combine MSN, Yahoo and MySpace in an effort to dominate the display-advertising market as an offset to Google's dominance in search adverstising.

The latest Microsoft-News Corp. discussions got more serious after News Corp.'s own discussions with Yahoo-about trading MySpace and some other Web sites for a stake in the Internet company-fell apart because Yahoo wouldn't agree to a $10 billion to $15 billion valuation for the News Corp. properties, according to people familiar with the talks.

Microsoft and News Corp. last year had discussed a broad advertising pact that fell apart when News Corp. chose other partners for an online video service called Hulu, according to a person familiar with the situation.

Later last year, the two companies started to talk about options for Yahoo, according to a person familiar with Microsoft's thinking. The plan the two companies discussed, according to this person, was for Microsoft to operate Yahoo's search and advertising technology, while News Corp. would contiol everything else, including Yahoo's broad array of online media properties.

A partnership with News Corp. could allow Microsoft to focus on the software and technical underpinnings of online services while offloading content and information-historically weak points for the software company-to News Corp., which specializes in that realm. "All Microsoft cares about is search and the ad engine," one person familiar with the situation said.

The partnership could also soothe the concerns of some Microsoft executives who balk at swallowing Yahoo whole. Microsoft has historically eschewed large acquisitions.

Nonetheless, people close to Microsoft said the company, while willing to discuss alternatives, still intends to do the deal alone. "We don't need the help," one person said.

People close to News Corp., say the company has several reasons for wanting to stqy involved in a deal. News Corp. continues to weigh how it might sell MySpace, which faces steep competition. The site continues to grow overall, but some executives feel its growth may have peaked.

Google and News Corp. have a pact that allows Google to sell search advertising on MySpace. While News Corp. Chairman Murdoch recently said News Corp. is "very happy to be in the Google camp," some within the company believe that News Corp. could do better.

Yahoo itself has been talking with Google. On Wednesday, the two companies announced a two week test in which Yahoo will carry Google search advertisements next to a small portion of its Web search results. Yahoo and Google are studying a broader search advertising pact, which could allow Yahoo to demonstrate that it is worth more than Microsoft has, offered, according to people familiar with the matter. Antitrust experts have said such a broader pact would likely raise regulatory issues.

The deal Yahoo is discussing with Time Warner would value AOL at around $10 billion. That valuation excludes AOL's fading dial-up Internet-access business, which had complicated negotiations with potential partners in years past.

Time Warner Chief Executive JeffBewkes said earlier this year that he would split the dial-up business from AOL's more attractive advertising and portal businesses-a move seen as a possible precursor to the sale of both businesses.

While AOL's position as a Web destination has eroded-reducing the value of a potential tie-up with Yahoo-AOL has quietly built a strong online advertising brokerage.

That business could give Yahoo ammunition to argue that a deal with AOL would create substantial value. For Yahoo Chief Executive Jerry Yang, the advantage of such a deal over a transaction with Microsoft is that it would allow Yahoo to maintain its independence. He would also likely remain in control of the company he co-founded.

AOL has little to lose in negotiating with Yahoo. The Internet unit remains the biggest headache for Mr. Bewkes, who is under pressure to boost the company's sluggish share price. Time Warner's weary investors are eager to see an AOL solution after the disastrous merger in 2001 and subsequent failed attempts to reinvent the Internet company.

Time Warner has explored combining AOL with other companies before, most seriously in 2005 when it held discussions with both Microsoft and Yahoo. Time Warner ultimately opted for an eleventh-hour deal struck with Google, in which Google bought a 5% stake inAOL that valued the unit at $20 billion.

By: Kevin Delaney, Matthew Karnitschnig, & Jessica E. Vascellaro; Merissa Marr, Robert A. Guth and Nick Wingfield contributed to this article
Wall Street Journal; April 11, 2008