Microsoft and Yahoo!

Microsoft throws in the towel

May 4th 2008
From Economist.com

The software giant withdraws its bid for Yahoo!

HE build up had all the atmosphere of one of boxing’s bigger bouts. But three months after Microsoft laid down the challenge, it elected to walk away from its takeover bout for Yahoo!. On Saturday May 3rd the software giant laid down its gloves, despite expectations of a hostile contest. One last attempt to improve the deal had failed. Microsoft said that it had raised its $44.6 billion bid by $5 billion, but that as Yahoo! was holding out for a bigger purse it would walk away. Failing to buy Yahoo! leaves Microsoft well short in its bid to go after the ultimate champion of the internet: Google.

Microsoft and Yahoo! are a distant second and third in the lucrative business of web search and related advertising. The idea of combining was to challenge the clear leader, Google. Microsoft wanted Yahoo! in order to add critical mass to Microsoft's own advertising platform, to make it more competitive. But Yahoo! was not keen to join the effort to become an advertising counterweight to Google. Jerry Yang, Yahoo!’s founder, had no wish to see the company he created swallowed up by Microsoft. Last year, in an effort to revive his former giant of the web, he resumed his role as chief executive and from that position tried to ward off an offer that he reckoned “substantially undervalues” the company.

These efforts set off a string of shifting alliances, rumour, claim and counterclaim that offered a variety of permutations of tie-ups between big internet firms. Yahoo! has been aiming to compete with Google for years, but without success. Under assault from Microsoft, Yahoo! has hinted that it might give up and, in effect, piggy-back on Google's superiority in order to boost its own profits and persuade shareholders not to sell to Microsoft. Yahoo! ran a limited trial in which it allowed Google to place text advertisements on Yahoo!'s search pages in America. Rumours circulate still that it wants to extend this arrangement. Moreover, other rumours suggest that Yahoo! has been discussing a merger with Time Warner’s internet arm, AOL.

As Yahoo! threw up its defences, Microsoft also became the subject of rumours. One suggested that Microsoft might team up with News Corporation, an old-media heavyweight controlled by Rupert Murdoch, a wily new-media operator too. The pair were said to be considering a joint bid for Yahoo!. Yet previously Mr Murdoch had been mooted as a “white knight” to save Yahoo! from Microsoft’s clutches. He, probably wisely, decided to avoid involvement in a bidding war against an opponent with deep-pockets.

In the end Steve Ballmer, Microsoft’s chief executive, said that Yahoo!’s determination to pursue closer ties with Google, even as takeover talks progressed, were reason enough to drop the takeover offer. For its part Yahoo! reckoned that the prospects of closer advertising ties with Google justified a much higher price than Microsoft was prepared to pay. Mr Ballmer said Microsoft was reluctant to launch a hostile bid as the firm was unwilling to get involved in a protracted fight for the support of Yahoo!’s shareholders. There was also concern that that Yahoo! might make matters more difficult in the meantime: it has already introduced some “poison pills” including an expensive buyout for any worker sacked by a buyer.

Microsoft has lost out and may now look elsewhere to take the fight to Google. Yet there are few obvious targets that would give it the boost that Yahoo! offers, although AOL is a possibility. Yahoo!’s shareholders also stand to lose heavily. Shareholders may not take kindly to a boss who has turned down a fair offer for the company—although Microsoft may yet return to the fray and bid for Yahoo! at a later date. Amid all the dissatisfaction that the fight did not reach a conclusion one winner stands out. Google still has no worthy competitor to challenge for its title as heavyweight champion of the internet.