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 has withdrawn its $42.3 billion bid to buy Yahoo Inc., scrapping an attempt to snap up the tarnished Internet icon in hopes of toppling online search and advertising leader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.
(Msnbc.com is a joint venture of Microsoft and NBC Universal.)
Microsoft was willing to pay $47.5 billion, or $33 per share, up from the bid's previous value of $29.40 per share, according to a letter from Microsoft Chief Executive Steve Ballmer to Yahoo Chief Executive Jerry Yang.
But Yahoo 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.
"After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," Ballmer said in the letter. "Clearly a deal is not to be."
"With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users," Yang said in a statement.
The decision to walk away came as a surprise, given that many analysts believed Microsoft wanted to close the deal badly enough to either sweeten the offer or pursue a hostile takeover — a risky maneuver that would have required shareholders to replace the Yahoo board that spurned the bid.
But Ballmer said he concluded that pursuing the hostile option through 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 of an arrangement in which it would outsource to Yahoo some of its search advertising business.
Ballmer said such an arrangement, which has drawn the scrutinty of federal regulators, would "fundamentally undermine Yahoo!’s own strategy and long-term viability" in the Internet advertising business.
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."
Still a deal would have given Microsoft a stronger foothold in its battle with Google, which is rapidly expanding into the software maker’s own turf with new Web-based applications.
Microsoft’s decision 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.
"From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view," Yahoo Chairman Roy Bostock said in the company's statement. "Our solid results for the first quarter of 2008 and increased full year 2008 operating cash flow outlook reflect the progress the company is making."
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.