Some big news on the Microsoft/Yahoo! saga today. Microsoft formally withdrew their offer to acquire Yahoo! today, despite raising their offer by $5 billion dollars to $33 dollars a share or a 70 percent premium compared to the closing price of Yahoo! stock on January 31st. Microosft originally offered 31 dollars a share back on January 31st which at the time was a 62 percent premium. According to Microsoft, Yahoo! wanted at least another $4 dollars per share above the $33 dollar increased offer from Microsoft. In a Microsoft press release, Steve Ballmer states “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,”.

The press release also contains an open letter to Jerry Wang, CEO and Chief Yahoo! of Yahoo!. In the open letter, Microsoft not only outlined why they were abandoning the offer, but they laid out the points as to why they were not going forward with a hostile takeover attempt of Yahoo!.

If Microsoft moved on a hostile takeover attempt, they believed Yahoo! would take steps to make the company “undersirable as an acquisition for Microsoft.” In short - Yahoo! would get in bed with Google which we’ve seen over the last few months - especially in the area of paid search ads.

What became clear from all of this was how critical a piece online advertising was to Microsoft. Microsoft was worried about Yahoo’s idea of using Google paid-search ads on Yahoo!’s own search engine. Doing this would trump the use of Yahoo!’s own Panama ad engine which would eventually result in the possible loss of valuable software engineers from Yahoo! This is made evident in the second bullet outlined in the open letter - “Given this, it would impair Yahoo’s ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.” While Microsoft has spent time and money to develop their own ad system, it’s becoming increasingly clear that Microsoft was interested in Yahoo’s Panama system and its engineers. This really shouldn’t be too surprising given how strong online advertising has been over the last several years and in particular, how strong Google has been in the overall market. Microsoft has struggled to keep pace with Google in the search arena but has definitely failed to keep pace with Google in the advertising market. Acquiring Yahoo would certainly help Microsoft draw closer to Google - at least in terms of technology and advertising clients.

So is this the end of the Microsoft-Yahoo! saga? Perhaps for now.. but you can be sure that if Yahoo’s stock price continues to sag, many shareholders will certainly be peeved that Yahoo did not accept Microsoft’s offer.

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