News

Microsoft Could Abandon Yahoo Bid, Ballmer Hints

• By Kurt Mackie
• April 23, 2008

"We're prepared to move forward without a merger with Yahoo," Ballmer said onstage at a technology conference in Milan.

However, Ballmer added in the next sentence that Microsoft still feels it can best advance its Web search and ad platform strategy by combining forces with Yahoo.

"We think the best way to move that forward is to come together with Yahoo," he said.

The topic initially had touched on Google, which "has the leading ad platform," Ballmer said. Google currently leads in terms of search use, as well as in online ad revenues. Yahoo is a distant second to Google, while Microsoft brings up third place with its MSN and Windows Live search offerings.

Microsoft's Chief Software Architect Ray Ozzie emphasized the importance of Web search ad revenues in an April 2008 Strategy Update memo issued to company employees. He said that online advertising is projected to grow "from $40B today to $80B in the next three years" and that it will be "the primary monetization mechanism for consumer services on the web."

The important point, for Microsoft, is to have control over that ad platform.

"As advertising transitions more and more to being digital, measurable, and competitively bid, the 'ad platform' is key," Ozzie wrote.

Yahoo's stated reason for spurning Microsoft's offer has always been that Microsoft is undervaluing the company with its offering of cash plus Microsoft stock. Microsoft's initial bid for Yahoo had offered Microsoft stock valued at $31 per share.

In the meantime, Yahoo touted its positive first quarter results and its new ad platform, AMP!, as reasons for shareholders to stay the course.

"As we look forward, we are particularly excited by the potential capability of AMP! from Yahoo!, our revolutionary new ad management platform to help us further extend our lead in display advertising, which more than any other area of online advertising we believe has great potential for growth," stated Sue Decker, Yahoo's president, in the company's 1Q 2008 results announcement.

Yahoo's unaudited first-quarter results showed a profit of $542.2 million. The company hasn't shown a first-quarter profit in more than two years.

Yahoo had angered Microsoft earlier this month by announcing it would test Google's ad platform, called "Adsense for Search." An alarmed Brad Smith, Microsoft's general counsel, suggested that any such deal between the two companies would monopolize Google's search ad business. Google and Yahoo apparently consulted with U.S. Department of Justice officials prior to the test, which lasted just two weeks.

Despite Ballmer's coyness, Microsoft may increase the pressure on Yahoo, upping the stakes by April 26, 2008. That's the deadline Ballmer set for the company to reach a deal on the acquisition bid. If Yahoo doesn't respond, Ballmer promised "a proxy contest to elect an alternative slate of directors for the Yahoo! Board" -- essentially a hostile takeover attempt.