Microsoft Drops Bid for Yahoo

SAN FRANCISCO -- Microsoft walked away from its bid to buy Yahoo over the weekend after the Internet company turned down its offer to raise the price by $5 billion to $47.5 billion.

Microsoft's offer was for $33 a share, but Yahoo would not lower its demand below $37, Microsoft chief executive Steve Ballmer said. The software company initially bid $31 per share for Yahoo more than three months ago.

"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 a statement.

Analysts said Yahoo had overplayed its hand, and they expected the web pioneer's shares to fall as much as 30 percent to $20 levels when Nasdaq trading resumes Monday. The stock rose nearly 7 percent to $28.67 on Friday on hopes of an agreement between Microsoft and Yahoo.

"Wow. I'm shocked Yahoo wasn't more reasonable," said Walter Price, a senior portfolio manager at RCM fund management company in San Francisco, which had 21 million Microsoft shares and 2 million Yahoo shares as of the end of December.

Laura Martin, a senior analyst at Soleil Securities, said she expected a number of shareholder lawsuits against Yahoo.

"The Yahoo guys want too much money for their company. We think $33 a share is fair in the context of the weakening economic environment and adverse advertising trends," she said.

"They've prioritized employees over shareholders in the hopes that someday they can create more than $8 billion of value, even if they have no track record of doing so," she said.

Some Wall Street analysts also have said Microsoft could pull its bid as a negotiating strategy aimed at putting pressure on Yahoo to eventually accept a future offer.

Yahoo chairman Roy Bostock said in a statement that the company believed from the beginning that Microsoft's offer undervalued it, and the board was "pleased that so many of our shareholders joined us in expressing that view."

He said Yahoo was pursuing "strategic opportunities" but gave no details.

Yahoo has courted possible deals with Time Warner's AOL Internet division or News Corp.'s MySpace online social network, and tested a search advertising partnership with Google. A partnership with Google may be announced as early as this week, said a person with knowledge of discussions.

Jordan Rohan, founder of digital media advisory firm Clearmeadow Partners, said Yahoo could name Time Warner as a partner or buy AOL to put a positive spin on the situation, but neither option would give as good a payoff to shareholders.

"Yahoo management and board overplayed its hand. Shareholders were cheated out of a victory," Rohan said. "I think Yahoo forgot what it felt like to have a share price under $20. They may be reminded soon."