May 4 (Bloomberg) -- Microsoft Corp., the world's largest software maker, walked away from its bid for Yahoo! Inc. after a disagreement on the price, a setback to Chief Executive Officer Steve Ballmer's efforts to catch Google Inc. in the online advertising market.
Microsoft said it offered to raise its $44.6 billion bid by about $5 billion, to $33 a share. Yahoo demanded $37, Microsoft said yesterday in a statement.
``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 statement.
Microsoft, whose Internet business lost $228 million last quarter, now faces the challenge of finding alternatives to buying Yahoo, a purchase that would have tripled its share of the U.S. Web search market. The decision also leaves Yahoo CEO Jerry Yang, 39, to prove he can revive sales growth and the stock price by keeping the company independent.
Yahoo Shares
Ballmer and deputy Kevin Johnson met yesterday in Seattle with Yahoo co-founders Yang and David Filo, two people familiar with the talks said. Yang and Filo refused to accept less than $37 a share and flew back to California. Ballmer called Yang to inform him of the decision just before it was announced, the people said.
``Unbelievable,'' said Laura Martin, an analyst at New York-based Soleil Securities Corp. ``This is management putting its employees and its job security ahead of current Yahoo shareholders' interest.''
She estimated Yahoo shares will fall $8, or 28 percent, tomorrow as Microsoft's withdrawal, combined with concern about the economy and the advertising market, weigh on investors. The stock has gained 49 percent since Microsoft's bid on Feb. 1.
Yahoo, the second most popular Internet search engine, rose $1.86, or 6.9 percent, to $28.67 May 2 in Nasdaq Stock Market trading as investors bet a deal was coming. Talks intensified and Microsoft was willing to raise the bid, a person familiar with the matter said May 2. Microsoft fell 16 cents to $29.24.
Not Hostile
Yahoo's stock had declined 32 percent in the year before Microsoft's offer as Google won more Web users and advertisers switched to social-networking sites such as Facebook Inc. and News Corp.'s MySpace.
``The shareholders will wake up tomorrow morning or tonight and say `Jerry, what are you doing?''' RBC Capital Markets analyst Robert Breza in Minneapolis said yesterday. ``They weren't doing the best job, and Microsoft put a fair offer on the table. And for them to up the bid and for these guys to not want to engage -- I think Microsoft (is) being smart here.''
Yahoo Chairman Roy Bostock reiterated yesterday in a statement that Microsoft's offer wasn't enough. The company will continue to expand search advertising sales while improving its display advertising business, he said.
``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,'' Yang said in the statement.
Higher Bid
Ballmer, 52, spent a week considering the price after Sunnyvale, California-based Yahoo let pass his April 26 deadline to come to terms. He had pledged to abandon the bid before he would overpay, saying May 1 that he wouldn't go ``a dime above'' Yahoo's value.
Yang had argued the company's rank in the U.S. search market and its Asian operations warranted a higher bid. He considered a combination with Time Warner Inc.'s AOL and tested advertising software from Google. This week, a person familiar with the matter said Yang might agree to a broader deal with Google.
``They did a two-week trial with Google where they outsourced 3 percent of their paid search and both sides reported that that the trial went very well,'' Jeffrey Lindsay, an analyst at Sanford C. Bernstein in New York, said today in a Bloomberg Television interview. ``It would strongly suggest to us that they do have something in the works with Google.'' Bernstein rates Yahoo shares ``market perform.''
No Proxy Fight
As the days passed after Ballmer's deadline, it seemed possible he would take the offer straight to Yahoo investors. Yesterday, Ballmer said he won't do that. That approach would result in a ``protracted proxy contest,'' and Yahoo indicated it would make decisions that Microsoft would find ``undesirable,'' Ballmer said in a letter to Yang that was released by Microsoft.
If Yahoo agrees to use Google's search advertising, it would lose its own ad customers and engineers who work in that field, Ballmer said. Yahoo already had a ``poison pill'' anti- takeover defense and a severance plan that would compensate any employee displaced by an acquirer.
Microsoft couldn't make a good enough return on the purchase if it would have paid more than $35, Charles Di Bona, an analyst at Sanford C. Bernstein & Co. in New York, said yesterday.
``It was to their credit that they weren't just chasing this deal at all costs,'' Di Bona said. ``On the other side, I think this does mean that they have to really come out and articulate what their Internet strategy now looks like.''
A Second Look?
Yahoo and Microsoft remain a distant second and third behind Mountain View, California-based Google in Web search queries. Google outsold Microsoft in Web ads 7-to-1 in its last fiscal year and handles six times as many search queries in the U.S., according to ComScore Inc. in Reston, Virginia.
Microsoft will continue to improve the relevance of its search results and build its advertising program, expand investments in engineering, and pursue partnerships to win more users, Ballmer wrote in an e-mail to employees yesterday.
The company could buy AOL and then go after MySpace, Di Bona said in an April 25 note. That would give Microsoft a substantial presence on the Internet, probably at a much lower cost than buying Yahoo, he said. UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor magazine, has said that Microsoft could come back and look to buy Yahoo later on if it walked away this time.
Oracle Corp., the third-biggest software maker, initially abandoned its bid for BEA Systems Inc. after BEA asked for 24 percent more than Oracle's $17-a-share bid. Oracle called the asking price ``impossibly high'' and said a deal couldn't be done with the current board. The two companies agreed to the buyout three months later at $19.38 a share.
``Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo,'' Ballmer wrote in the e-mail.
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