Microsoft withdraws bid for Yahoo after negotiations fail

SAN FRANCISCO -- Microsoft Corp. has withdrawn its $42.3 billion bid to buy Yahoo Inc., scrapping an attempt to snap up the tarnished Internet icon in hopes of toppling online search and advertising leader Google Inc.

The decision to walk away from the deal came Saturday after last-ditch efforts to negotiate a mutually acceptable sale price proved unsuccessful.

The talks reached a breaking point after Jerry Yang and David Filo, the co-founders of Sunnyvale-based Yahoo, flew to Seattle in the morning to meet personally with Microsoft chief executive officer Steve Ballmer and Kevin Johnson, who runs the software maker's unprofitable online services division, according to someone familiar with the talks. The person was not authorized to speak publicly and asked not to be identified.

"Clearly a deal is not to be," Ballmer wrote to Yang in a letter sent late Saturday.

Microsoft was willing to pay $47.5 billion, or $33 per share, up from the bid's current value of $29.40 per share, according to Ballmer's letter.

But Yahoo's board demanded at least $53 billion, or $37 per share, according to Ballmer. That would have been nearly double Yahoo's stock price of $19.18 at the time Microsoft first made its bid a little over three months ago.

And Yang, who became Yahoo's CEO 11 months ago, wanted $38 per share in a Wednesday meeting, according to the person familiar with the discussions. That meeting was held the day after Yang and Yahoo chairman Roy Bostock called to ask Microsoft not to withdraw its bid, the person said.

In a statement Saturday, Bostock reiterated that Microsoft had undervalued his company's assets since the takeover tug-of-war began more than three months ago.

"We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo for success and leadership in its markets," Bostock said.

The decision to walk away came as a surprise, given that many analysts believed Microsoft wanted to close the deal badly enough to pursue a hostile takeover -- a risky maneuver that would have required an attempt to replace the Yahoo board that rejected the bid.

Although he had threatened a hostile takeover attempt last month, Ballmer said he concluded that waging a so-called proxy battle was "not sensible."

"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," Ballmer wrote to Yang.

But Yahoo hasn't necessarily faded from Microsoft's crosshairs. The software maker conceivably could renew its bid later this year if Yahoo can't bounce back from more than two years of financial lethargy.

Should Yahoo's turnaround efforts flop, many analysts believe the company's stock would sink into the mid-teens and open the door for another takeover offer that would be more difficult to rebuff.

For now, at least, Microsoft appears to believe it has enough internal weapons to chip away at Google's dominance of the booming Internet ad market.

"We have a talented team in place and a compelling plan to grow our business through innovative new services and strategic transactions with other business partners," Ballmer said. "While Yahoo would have accelerated our strategy, I am confident that we can continue to move forward toward our goals."

Microsoft's move intensifies the pressure on Yang to reverse the lackluster growth that has eroded Yahoo's profits and depressed its stock price since 2005, making it vulnerable to an unwanted takeover.

Yang has projected that Yahoo's revenue will rise by 25 percent in 2009 and 2010, propelled by an expanded Internet advertising network that's using more sophisticated tools to target consumers.

But analysts haven't raised their forecasts to anywhere near Yang's predictions, reflecting doubts that may trigger a rebellion among Yahoo's restive shareholders if it looks as if management isn't delivering on its promises.

Analysts are divided on just how much Microsoft needs Yahoo.

One school of thought is that a Yahoo takeover could have turned into an expensive headache that probably wouldn't start delivering dividends for two or three years. While Microsoft grappled with a Yahoo acquisition, Google theoretically could have benefited from the distractions and grown even stronger.

Without the Yahoo takeover on its plate, Microsoft can focus more on core software business with plenty of money available to buy more nimble Internet startups that could bolster its online operations.

But other analysts believe Yahoo -- with 500 million users, a prized brand and the second largest ad network behind Google's -- represented Microsoft's best chance to remain a powerhouse as the Internet increasingly defines how and why people interact with computers.

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AP Technology Writer Jessica Mintz in Seattle contributed to this report.