Beyond Binary

Monday morning meant back to reality for both Microsoft and Yahoo, after talks between the two sides collapsed over the weekend.

Both companies have maintained they had a strategy independent of the other, but now the two sides will have to prove it. The companies are likely still in dealmaking mode--just not with each other. Yahoo is still pursuing deals with Google and AOL, a source tells CNET News.com, while Microsoft has indicated that it will also look at other business deals. AOL could be on Microsoft's short list as well.

Yahoo shares, meanwhile, got their expected pummeling, with many investors still shaking their heads over how Jerry Yang could "just say no."

So, what now?

Well, the decision to end talks is a full employment act for talking heads, including yours truly.

I recorded a video with News.com Editor in chief Dan Farber in which the two of us discuss the matter, while Stephen Shankland and I took up the same topic on Monday's News.com daily podcast. If you want still more, I'll be on the public radio show Marketplace Monday afternoon taking up the topic again.

As for the companies, it's time to move on to Plan B. I took a look at Microsoft's Plan B over the weekend, while Shankland did the same for Yahoo. But I'm curious to hear what others think. Was Jerry Yang crazy to say no? Should Steve Ballmer be thanking his lucky stars?... Read more

Despite a brief moment of optimism heading into Saturday, Microsoft and Yahoo were really never closer to doing a merger deal than two ships passing in the night.

There was almost no discussion of price, and those talks that were held suggested to Microsoft that Yahoo was never really prepared to sell itself to the software company, according to a source familiar with the negotiations.

A source familiar with Yahoo's negotiating stance disputed the characterization. However, judging by Yahoo's relative intransigence on price and insistence on several other requirements, it's clear the company wasn't eager to strike a deal. The company didn't want to let it itself be sold at what it deemed a "fire sale" price, the source familiar with Yahoo's position said.

Yahoo wasn't eager to rush things. Although Microsoft made its initial unsolicited $31-share offer for Microsoft on February 1, the first substantive meeting didn't take place until April 15--10 days after Microsoft set a three-week deadline for Yahoo to come to the

Here is the text of an internal memo Microsoft CEO Steve Ballmer sent Saturday afternoon to Microsoft employees:

From: Steve Ballmer

Sent: Saturday, May 03, 2008 5:18 PM

To: Microsoft - All Employees (QBDG)

Subject: Withdrawal of Offer to Acquire Yahoo!

This afternoon I sent the attached letter to Jerry Yang announcing that Microsoft has withdrawn its proposal to acquire Yahoo. We proposed the deal in the belief that a Microsoft-Yahoo merger would create a combined company with the resources and assets to win in the fast-growing market for advertising and online services.

Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo. We have a strategy in place to do so and we will continue to expand on this strategy and accelerate our progress.

Our strategy has three components:

•Deliver on the basics. We will continue to improve search relevance and build out our ad platform.

•Change the game through innovation. We will expand investments in engineering and deliver transformative tools and Web experiences.

•Expand our global scale and focus. We will pursue partnerships and investments to realize the competitive advantages that come with scale.

At the heart of our strategy is a commitment to bring the benefits of competition, choice, and innovation to everyone who uses the Internet--from consumers to content creators to advertisers.

We are 100 percent focused on executing on this ... Read more

Microsoft says its offer for Yahoo is off the table, but could this be just a negotiating ploy?

It's a natural question to ask. I mean, if Microsoft has had the hots for Yahoo for two years, can it really be so sure that it is no longer interested?

My take is that Microsoft has ruled out two options, but that one possibility for Yahoo remains out there.

Clearly, Microsoft is not having luck getting Yahoo to consider the price it is willing to pay, so the direct option hasn't worked. CEO Steve Ballmer says that Microsoft has also ruled out going directly to shareholders, a move that would likely require a nasty, costly, and time-consuming proxy fight.

In particular, Yahoo has proven itself adept at making itself a less attractive takeover target. In addition to the usual sorts of poison pill defenses, it has found other weapons like cutting sweetheart deals for employees and negotiating a partnership with Google, the very company Microsoft is looking to rival.

Such a move might ... Read more

With Yahoo apparently off the table, it's time to see what Microsoft's back-up plan looks like.

Microsoft has said for some time that it has a strategy with or without Yahoo, but it's a strategy clearly in need of a jump-start.

In search, for example, Microsoft has been trying to take on Google for some time, but it remains a distant third in search queries and also has struggled in the all-important battle of monetizing each search query.

Microsoft outlined two key reasons for buying Yahoo--adding its talented engineers and getting the significant boost in scale that would come from buying the No. 2 player.

Clearly, Microsoft could use just a fraction of those billions and get a ton of engineering talent. The scale problem, however, is a more challenging one. As Microsoft CEO Steve Ballmer himself said in a meeting with employees on Thursday, there just aren't that many companies out there with any significant scale.

As for where else the company may look, Ballmer's recent comments to The Wall Street Journal offer a cheat sheet to the short list.

"There's really only five or six that really have any scale," Ballmer said in that interview. "Worldwide, you'd maybe get seven or eight."

Among those companies with scale that Ballmer named were Facebook, MySpace.com, and AOL, along with the Yahoo, Google, and Microsoft itself.

Although Facebook and MySpace have huge audiences, selling advertising against those sites has proved to be trickier than in search. ... Read more

Here is the text of the letter Microsoft CEO Steve Ballmer sent to Yahoo chief Jerry Yang after talks broke down on Saturday.

May 3, 2008

Mr. Jerry Yang
CEO and Chief Yahoo
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Jerry:

After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo!.

I first want to convey my personal thanks to you, your management team, and Yahoo!’s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.

I am disappointed that Yahoo! has not moved towards accepting our offer. I first called you with our offer on January 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62 percent premium at that time reflected the strength of these convictions.

In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion ... Read more

Microsoft officially pulled its offer for Yahoo on Saturday, confirming an earlier report by CNET News.com.

In a letter to Yahoo CEO Jerry Yang, Microsoft chief Steve Ballmer confirmed that Microsoft was willing to offer $33 a share, but that Yahoo was holding out for at least $37 a share, or $5 billion more than Microsoft was prepared to spend. In the letter, Ballmer also says he is ruling out a direct offer to shareholders.

"This approach would necessarily involve a protracted proxy contest and eventually an exchange offer," Ballmer said. "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."

Ballmer specifically pointed to Yahoo's plan to outsource its paid search to Google. "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," Ballmer said. ... Read more

Update 5 p.m. PDT: Microsoft has made its move official. Click here for the story and here for the text of a letter Ballmer sent to Yang.

Microsoft is withdrawing its offer for Yahoo after talks between the two companies broke down on Saturday, a source told CNET News.com.

Microsoft hiked its offer to $33 a share, but Yahoo was holding out for $37 a share, the source said. The two sides met face to face again Saturday, but remained far apart.

Although price was a key issue, Microsoft also had strategic concerns and saw it as unlikely to achieve a friendly integration process. According to a source close to Microsoft, Yahoo founder and CEO Jerry Yang had "unrealistic expectations."

Microsoft made its $31 a share cash and stock offer on February 1. Yahoo rejected the bid as undervaluing the company, and the two sides had only the most basic of negotiations until Microsoft set a three-week deadline last month. Negotiations heated up on Friday, but the two sides remained far apart. ... Read more

As we all know by now (thanks Silicon Alley Insider), Microsoft CEO Steve Ballmer addressed his troops Thursday and talked Yahoo for at least a little bit.

Microsoft on Friday filed a transcript of Ballmer's remarks. It's basically more of the same, but some might find it interesting, so I've pasted the Yahoo-related portion of the speech in its entirety below:

Steve Ballmer rallied the Microsoft troops on Friday. He's show here doing his Monkey Boy reprise at the Mix 08 trade show in Las Vegas.

(Credit: Ina Fried/CNET News.com)

"We've been reading a lot about the Microsoft-Yahoo! deal in the newspaper, and recently read a few articles about Yahoo! partnering with Google to avoid being overtaken by Microsoft. As an employee, we would like to understand what's there in Yahoo that is attracting Microsoft to buy it.

Two, related, what are our plans to quickly get onto number two position if the Yahoo bid doesn't work?

I'll consider that open season to kind of talk about what we're trying to get done with Yahoo--not open season on Yahoo, open season on what we're trying to get done--(laughter)--with Yahoo!

There's a few things people have to have in their minds, because it's really important, and then I'll give you a context as to the tactics and what's going on in the newspaper.

We are absolutely 100 percent determined to build the ... Read more

Microsoft's discussions with Yahoo "intensified" Friday as the two companies considered possibilities for a last-minute friendly acquisition, The Wall Street Journal reported, citing anonymous sources.

While a deal is far from imminent, the two sides are talking more directly than they have for some time, a source familiar with the situation told CNET News.com. The talks, which picked up steam on Friday, are being held in the San Francisco Bay Area, with at least some of the parties on both sides meeting in person, the source said.

And The New York Times had a similar assessment, citing a source who said talks were back on and that Microsoft had increased its offer by "several dollars." Late Friday afternoon, the Journal said that the two companies were "discussing a possible price in the mid-$30s range per share."

The purported talks, if successful, could spare Microsoft the trouble and time of a hostile bid for the search company, if indeed it chooses not to walk away from its three-month-long attempt to acquire Yahoo.

The talks are no guarantee a deal will close, but investors found the evidence convincing. Yahoo's stock rose $1.82, or 7 percent, to $28.63, in late-day trading.

It should be noted that Microsoft's position, as viewed through the "people familiar with the matter" who have The Wall Street Journal on speed dial, has changed dramatically in a short period of time. In the last day, Microsoft has moved from threatening to walk ... Read more