Microsoft Bails. World Yawns. Much Written.

The on again, off again drama of Microsoft’s potential acquisition of Yahoo came to a close this past weekend, for now at least. This first chapter or perhaps conclusion of a story, took just north of three months to unfold. The problem with these situations is you have parties to make happy, people in favor of the takeover and those not in favor, both at Microsoft and Yahoo. No matter what the outcome fifty-percent will wind up disappointed. For the rest of us, it is and has been business as usual. If we look at the total dollars spent in the online customer acquisition market, we wager that they do not flow proportionately to Google, Yahoo, Microsoft based on their overall share of market. While quite a bit relies on the email inboxes powering the hundreds of millions of users, only a handful of companies have cracked the code to spending scalable money with Yahoo and Microsoft, as that means display. In other words, most in this space, didn’t really care, but we all like a good story, so here’s the time line of what happened for your perusal.

Jan 31 – It begins. Microsoft announces its intent to acquire Yahoo for $29.40 per share. Yahoo shares surge.

April 5 – As reported in the NY Times, Microsoft sends a threatening letter to Yahoo on April 5 suggesting that Microsoft would try to force a shareholder vote to circumvent Yahoo’s management if the companies could not reach an agreement within three weeks.

April 15 – Microsoft and Yahoo hold a secret meeting in Portland, Ore., in which the companies discussed “social issues” — like who would run the Yahoo unit if it were folded into Microsoft — but no decisions were made.

April 18 – Bankers for Microsoft and Yahoo hold a conference call in which Yahoo’s bankers suggested that $40 a share would be a “slam dunk” that would get the deal done.

April 26 – Deadline for decision passes. Microsoft doesn’t proceed with hostile action.

April 29 – Ballmer and Yang speak as Yahoo sought to reach a deal to keep Microsoft from turning hostile. In those talks, Mr. Yang overruled his bankers, telling Mr. Ballmer that Microsoft did not have to go as high as $40 a share to get a deal done, and suggested that they begin negotiations.

April 30 – Face to face meetings with Ballmer, Yang and bankers

May 3 – Final talks occur, deal sweetened to $33 per share, an increase of $5 billion given that each dollar per share is equal to about $1.4 billion. No resolution made; statements issued (see below). Google snickers.

May 3 – Microsoft issues its press release announcing the decision to withdraw from acquisition. CEO Ballmer states, "We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo! and the market as a whole" and that, "Despite our best efforts, including raising our bid by roughly US$5 billion, Yahoo! has not moved toward accepting our offer." The release also contains a letter from Ballmer written to Yahoo’s Yang. The NY Times has it here. Definitely read it. Only Ballmer could get away with saying such things as, "…this seems unwise from a business perspective." Like us, Ballmer likes lengthy notes. It took about 700 words before he says, "Instead, I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!."

May 3 – Yahoo Corporate Blog, Yodel Anecdotal, posts at 7:34pm, "In case you haven’t already seen the news, Microsoft today withdrew its proposal to acquire Yahoo!. Here’s our press release, with comments from Yahoo! board chairman Roy Bostock and CEO Jerry Yang.

Nicki Dugan, Blog Editor." Comments range from, "Great news!" to "You’re delusional" and everything in between.

May 4 – Yahoo Corporate Blog, Jerry Yang posts "Just so we are all clear, here’s what happened. The board took its mission very seriously. We clearly indicated to Microsoft that we were open to a transaction but only if it were on terms that fully recognized the value of Yahoo! and was in the best interests of our stockholders." He also says, "No one is celebrating about the outcome of these past three months… and no one should." The 23 comments on the prior day’s posts well exceeded the fewer than five comments the blog receives on average. Mr. Yang’s post, attracted 139 (at the time of writing), many worth reading. An interesting observation and absolutely not-politically correct, those with Indian names skewed demonstrably more positive on Yahoo’s decision.

May 5 – Backup plans. AOL reaches out to Microsoft. Yahoo again talking to NewsCorp as well as AOL. Microsoft rumored looking for the 98.5% of Facebook they don’t own. Markets bitch slap the stock.

May 5 – Pundits and news sources weigh in.

• Henry Blodget takes a stock centric approach suggesting Yahoo outsource as much as they can to Google. He argues only query share matters and "This loss of share will likely continue, no matter what Yahoo does on the technology side." The company should only invest in Panama if they believe it can help regain query share. In a later post he says, "Less than 48 hours after Microsoft (MSFT) pulled the plug on its Yahoo (YHOO) offer, Yahoo has already admitted publicly that it would have been willing to do a deal below $37. It has also already said that it would be happy to reopen talks with Microsoft."
• From the Times UK, "Sir Martin Sorrell, chief executive of WPP, the advertising group, says, "Microsoft showed price discipline by not going above their revised offer. You don’t need to worry about Microsoft, they are a $300 billion company with plenty of other ideas to explore. The people who have lost out most are their customers and [advertising] agencies who were looking for a better balance in the marketplace. Such a deal would have provided that balance."
• Danny Sullivan begins by saying, "Despite what I’m about to write, I like Microsoft. I’ve got many friends who work there (and at Google & Yahoo), and as a company, I actually want Microsoft (along with Yahoo) to provide a strong counter-balance to Google." (For artistic integrity it is worth knowing Danny beat most and posted his thoughts the evening of the 4th.) As he has a habit of doing, his makes some great points, chief among them, Microsoft has spent five years trying to figure out search and has only losses to show, and no brand. We read somewhere else that In the nine months ended March 30, Microsoft’s online-services division had a $745 million loss, and it had only a loss of $407 million for the same period a year prior. 
• Forbes – "Without a powerful new portal to suck up advertising dollars, online advertising power could continue to shift to the hot areas of the moment, such as mobile phones and social-networking sites like Facebook."
• NY Times – Countering Yahoo’s own words, "People close to Yahoo said that the chief executive, Jerry Yang, and his team, who told Microsoft they would not sell for less than $37 a share, greeted Microsoft’s decision as a victory. High-fives were exchanged Saturday afternoon when they learned Microsoft was backing down."
• WSJ – "I don’t think this is an end point. This is only the closing of a chapter." says David Kenny, CEO of Digitas, the digital-marketing concern owned by French ad-holding giant Publicis Groupe.
• BoomTown – Kara Swisher speaks to many Yahoo executives, quotes include, "It shows a complete lack of connection to the balance of the company" as well as "I can’t really talk to Jerry, since it is difficult to tell a founder tough things he probably needs to hear" and "I don’t love that it was Microsoft, but I think everyone thought $33 was a pretty good offer from a pretty good tech company." Her advice for Yahoo, don’t make "too many sudden moves to placate Wall Street, like a possible alternative merger with AOL."
• William Morrison, Research Analyst with ThinkPanmure – writes that the deal "…may [be] likely to go down as one of the more destructive decisions for shareholder value in the history of Internet stocks."
• Ross Sandler, Research analyst with RBC Capital Markets – says post deal collapse, Yahoo "is going to face significant execution challenges, shareholder lawsuits, employee attrition, and a weakening ad economy."

May 8 – Now it’s our turn to comment. First off, we feel for the employees. Imagine being a senior executive at Yahoo, especially one hired in 2006. Their stock grant was most likely around $20 and as high as $24. They’ve watched the stock lag and their potential upside go nowhere for two years. A deal above $30 would have given them at least $10 per share profit, which for many meant a seven-figure payout. They’ve suffered through the bureaucracy of Yahoo and just wanted some green for their time. Now, the stock is back down close to where it was issued with no clear strategic vision and leadership that guarantees it going higher. Second, we take serious issue with any notion that Yahoo should outsource to Google. From a narrow point of view, it makes financial sense, but it’s the Internet equivalent of the proposed suspension of federal exercise tax on gas.

Our third issue after feeling for both companies’ employees and our dismay at Yahoo outsourcing to Google comes the rumored Microsoft and Facebook. Don’t do it. The benefit of Yahoo is that they have scale now. They have a business that can support six billion in advertising spend. A combined Microsoft-Yahoo could have meant gaining dollar share from advertisers. At the end of the day, there are finite dollars from the big spenders and the one with the biggest percentage of users can often get a disproportionate share of money. Facebook might have a value not far from Yahoo but their platform currently supports a spend 1/20 that of Yahoo. Unlike MySpace too, Facebook’s value is at a premium, so an acquisition of Facebook isn’t likely to earn the value for shareholders the way that MySpace did for NewsCorp. Even using MySpace as an example presents challenges, because the once darling of the NewsCorp family has since hurt the parent company’s stock (as reported last week), the social networking site’s earnings suggesting that monetization of the site hasn’t proven as easy as hoped. Those in favor would gamble on Facebook’s eventual monetization, long-standing role in the Internet ecosystem and eventual multi-billion dollar per year revenues. Not that they are wrong, but such a pursuit seems a knee-jerk reaction.

In some ways, it’s too bad something hasn’t happened. Google’s AdWords still offers the only scalable and still somewhat hidden gem of self-service display inventory. And for once, Microsoft had the majority of public support in its quest to keep Google at bay. Amazing how times change.