Microsoft abandons Yahoo acquisition

'We believe the economics demanded by Yahoo do not make sense for us,' Ballmer says

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On March 18, Yahoo kicked off a tour to investors by dusting off a three-month-old financial plan to reinforce its contention that the company was worth much more than Microsoft offered to pay for it. The plan, which had originally been presented to Yahoo's board in December, predicted that Yahoo will double its operating cash flow over the next three years from $1.9 billion to $3.7 billion. The plan also forecast that, subtracting the commission that Yahoo pays to sites in its advertising network, the company will generate $8.8 billion in revenue in 2010. Financial analysts agreed that the plan is highly optimistic.

Yahoo also got into hyperactive mode with product and strategy announcements after Microsoft's bid, always pointing out that each initiative proved that it is able to improve its situation as an independent company. For example, it acquired online video player Maven Networks Inc., announced its social network OneConnect mobile service, relaunched its video site and introduced Yahoo Buzz, a social news site that has been well received.

The company also announced AMP, a new advertising management platform that Yahoo said will "significantly simplify" buying and selling ads online and that will roll out in phases starting in 2008's third quarter and continuing into 2009. Yahoo also added video to Flickr and joined Google's OpenSocial project of common application programming interfaces for social networking applications.

It also recently announced its most ambitious plan yet to take advantage of the popularity of social networking. Yahoo Open Strategy (YOS) calls for the company to swing wide open the doors of its Web platforms to let outside developers create applications across its network of sites, starting with its search engine via a beta project called Search Monkey.

Of course, there have been also reminders of why the company found itself an acquisition target. The most concrete of these reminders was on Feb. 12, when Yahoo started laying off about 1,000 staffers. Meanwhile, prominent executives such as Bradley Horowitz, vice president of product strategy, voluntarily departed, in Horowitz's case to rival Google.

As time passed, Microsoft's hopes of a swift acquisition and integration evaporated. Ballmer maintained all along that the offer was fair and seemed perplexed that Yahoo didn't jump to accept it. At the prospect of a dragged-out proxy fight, to be followed by a complicated and lengthy integration of MSN and Yahoo, Ballmer apparently grew increasingly disenchanted.

If Microsoft had more than $40 billion to spend on Yahoo, it can certainly go shopping for the many start-up and niche companies that have gained traction in Web 2.0 areas such as social networking, social news, video, Web-hosted applications and mobile advertising.

Considering Ballmer's well-known competitive nature, he will dust himself off and draw up another plan, because one thing is clear: While Ballmer is giving up on acquiring Yahoo, he is certainly not giving up on his dream to top Google in online advertising, particularly in search.

"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. While Yahoo would have accelerated our strategy, I am confident that we can continue to move forward toward our goals," Ballmer said in Saturday's statement.

"We are investing heavily in new tools and Web experiences, we have dramatically improved our search performance and advertiser satisfaction, and we will continue to build our scale through organic growth and partnerships," said Kevin Johnson, Microsoft president for platforms and services, in the statement.

As of the end of 2007's third quarter, Google had almost 25% of the U.S. Internet advertising market, up from almost 21% in 2006's third quarter, according to market research firm IDC. Meanwhile, Yahoo's share during this period dropped to 11.3% from 12.3%, while Microsoft's declined to 5.2% from 5.8%, according to IDC.

In search usage, Google held a commanding 62.4% of queries worldwide, followed by Yahoo in a very distant second place with 12.8%, according to comScore Inc. Microsoft ranked fourth with 2.9%, after Baidu.com Inc. with 5.2%.

In November, Yahoo ranked first in the U.S. in display ad impressions with a 19% share, while Microsoft came in third with 6.7%, after News Corp.'s Fox Interactive Media Inc. unit with 16.3%, according to comScore. Google took seventh place with 1%.

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Copyright © 2008 IDG Communications, Inc.

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