Microsoft Withdraws Proposal to Acquire Yahoo!

Microsoft Corp announced on May 3rd that it has withdrawn its proposal to acquire Yahoo!. “We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo! and the market as a whole. Our goal in pursuing a combination with Yahoo! was to provide greater choice and innovation in the marketplace and create real value for our respective stockholders and employees,” said Steve Ballmer, chief executive officer of Microsoft. Microsoft offered to buy Yahoo! at $31-per-share offer in February. Microsoft had then upped its bid to $33, but then withdrew from the talks when Yang asked for $37.

Many think that Yahoo! refused Microsoft offer because the company thinks that it could conclude a better deal with other partners. Yahoo has just tested an advertising partnership with Google. A tie-up with Google should help boost Yahoo’s operating performance in the near term, the company focusing only on content providing and no more on advertising management. But in the long term, it sounds like abandoning a very promising source of revenues to a competitor. Yahoo could also consider a deal with another Internet media and advertising major, such as Time Warner’s AOL.

The clear winner of this battle is Google, because the Microsoft-Yahoo! alliance could be the only current thread to its online advertising market dominance. It has to be said however that beyond the plain market share numbers, the integration of Yahoo! and Microsoft employees was considered less than easy.

Microsoft is left alone to find a substantial new growth engine. The company has done in these recent years a lot of “me-to” initiatives (XBox, Zune, Silverlight, MSN), trying to emulate the success of other companies, but it had never reached the success it was looking for, despite the vast amount of cash that it could invest in each new area. Its on-line division is currently loosing money.

If however Yahoo! doesn’t find rapidly a good strategic fit, Microsoft could still come back with a new offer. And as Yahoo! stock price could drop back to the $20 level; investors will watch it with a different eye.

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