Microsoft Abandons Yahoo Acquisition

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Courting Google

No alternative deal ever materialized for Yahoo, except for a very limited, albeit eyebrow-raising, test that saw Yahoo run Google ads along with some search engine results on Observers speculated that the test, announced on April 9, could lead to a full-blown outsourcing of Yahoo's search ad business to Google, a move that financial analysts believe could boost Yahoo's revenue. Press reports last week indicated that Yahoo and Google might still enter into such a deal.

This possible deal with Google played a big part in Microsoft's decision to walk away, Ballmer wrote in his letter. If Yahoo outsourced search advertising to Google, the deal would "fundamentally undermine" Yahoo's long-term viability, he wrote.

"This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on your display advertising business to fuel future growth," Ballmer wrote.

Moreover, the Google deal would cause key advertising-system engineers to leave Yahoo and would create regulatory and legal problems that Microsoft wouldn't want to inherit, Ballmer wrote.

Yahoo also made overt maneuvers to buy itself time. For example, on March 5, Yahoo lifted the following week's deadline for nominating directors to its board, an attempt to discourage Microsoft from launching a proxy fight to replace the current board with members willing to approve its Yahoo acquisition bid.

On March 18, it kicked off a tour to investors by dusting off a three-month-old financial plan to reinforce its contention that Yahoo is worth much more than Microsoft offered to pay for it. The plan, which had originally been presented to Yahoo's board in December, predicts that Yahoo will double its operating cash flow over the next three years from US$1.9 billion to $3.7 billion. The plan also forecasts that, subtracting the commission that Yahoo pays to sites in its advertising network, Yahoo will generate $8.8 billion in revenue in 2010. Financial analysts agreed the plan is highly optimistic.

Yahoo also got into hyperactive mode with product and strategy announcements after Microsoft's bid, always pointing out that each initiative proved that it is able to improve its situation as an independent company. For example, it acquired online video player Maven Networks, announced its social network OneConnect mobile service, re-launched its video site and introduced Yahoo Buzz, a social news site that has been very well received.

It also announced AMP, a new advertising management platform that it says will "significantly simplify" buying and selling ads online and that will roll out in phases starting in 2008's third quarter and continuing into 2009. Yahoo also added video to Flickr and joined Google's OpenSocial project of common APIs for social networking applications.

It also recently announced its most ambitious plan yet to take advantage of the popularity of social networking. Yahoo Open Strategy (YOS) calls for the company to swing wide open the doors of its Web platforms to let outside developers create applications across its network of sites, starting with its search engine via a beta project called Search Monkey.

Of course, there have been also reminders of why the company found itself an acquisition target. The most concrete of these reminders was on Feb. 12, when Yahoo started laying off about 1,000 staffers. Meanwhile, prominent executives like Bradley Horowitz, vice president of product strategy, voluntarily departed, in Horowitz's case to arch-rival Google.

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