Microsoft: We only wanted to buy Yahoo if quickly

In the wake of Yahoo's decision to go with Google, Microsoft's Kevin Johnson explains in a memo why it was no longer willing to buy all of Yahoo.

With Yahoo now off having fun with Google , Microsoft is trying to convince its troops that the single life ain't so bad.

In a memo to those in his unit, Windows and Windows Live boss Kevin Johnson said part of the reason Microsoft abandoned its offer to buy Yahoo was that it viewed speed as of the essence if it were to buy the company.

"In a March 10th meeting in Palo Alto, we explained to Yahoo management the importance of reaching an agreement by the end of April in order to have an opportunity to complete the regulatory process by the end of this calendar year," Johnson wrote in the memo, which was seen by CNET News.com. "Because we could not come to an agreement on price by the end of April and given our concerns about Yahoo's business performance, we elected to withdraw our bid and pursue better options for Microsoft."

Once that didn't happen, Johnson said Microsoft moved on to explore another type of deal, details of which have dribbled out over the last day or so . Johnson highlights why he thinks Microsoft's deal was a better one for Yahoo shareholders.

Here's the full text of his e-mail (with exclamation points removed from Yahoo's name):

From: Kevin Johnson

Sent: Friday, June 13, 2008 2:20 PM

Subject: Update on our Yahoo discussions

I wanted to take an opportunity to provide my thoughts and perspective on the conclusion of our discussions with Yahoo, and its announcement of a commercial agreement with Google.

As I shared in my mail on May 18 (see attached), we have better options than a full combination with Yahoo at the price it suggested, and we have moved forward on our strategy to grow our online business.

Let me share a little background with you. When we made our original proposal on February 1st to combine with Yahoo, we offered a 62 percent premium that was based on a desire to reach an agreement in short order. The faster we could reach an agreement, the sooner we could begin the regulatory process and create value through this combination.

In a March 10th meeting in Palo Alto, we explained to Yahoo management the importance of reaching an agreement by the end of April in order to have an opportunity to complete the regulatory process by the end of this calendar year. Because we could not come to an agreement on price by the end of April and given our concerns about Yahoo's business performance, we elected to withdraw our bid and pursue better options for Microsoft.

During the last few weeks, we spent a considerable amount of time with Yahoo discussing an alternative proposal around search. Specifically, this search proposal had three components:

• Microsoft would have invested $8 billion in Yahoo at $35/share;

• Microsoft would have purchased Yahoo's search assets for $1 billion, and assumed the operations and R&D expense while returning data back to Yahoo for use in their advertising business; and

• Microsoft and Yahoo would have entered into a long-term search partnership, where Microsoft would have provided favorable economics to Yahoo search, including a three-year guarantee of higher monetization than Yahoo's Panama paid search system currently provides.

This partnership would have created a stronger competitor to Google, providing greater choice and innovation for advertisers, publishers and consumers. This approach could have been implemented quickly and would have simplified the integration process for both parties. It would have also established the basis for a long-term Internet partnership between Yahoo and Microsoft.

We believe this proposal would have created compelling value for Yahoo and its shareholders in at least three ways:

• New Transfer of Cash to Yahoo Shareholders. This proposal would have transferred $9 billion from Microsoft to Yahoo, which could have been used by Yahoo to reward their shareholders.

• A More Profitable Ongoing Business. This proposal would have resulted in higher operating income on an annual basis for Yahoo, with our projections more than doubling Yahoo's operating income in the first year of operation, and increasing it by more than $1 billion above its current operating income level.

• A More Compelling Search Offering. The combination of the search platforms would have unlocked new R&D innovation, eliminated redundant engineering efforts and allowed for greater scale in serving our customers.

Taken together, we believe that our proposal would have created total value for Yahoo's shareholders in excess of $33 per share.

Unfortunately Yahoo has chosen a different course, and yesterday announced an agreement that would start to consolidate over 90 percent of the paid search advertising market in Google's hands. This will make the market far less competitive. There are many experts who suggest that a host of legal and regulatory problems lie ahead for Google and Yahoo.

Regardless of Yahoo's decision, we will continue to move forward on our strategy in online services and advertising.

Since my mail on May 18, we have been making great progress. At our Advance '08 conference, we announced Live Search Cashback and Live Search Farecast, and the initial response to these user experience and business model innovations in search has been very positive. On June 2nd, we also announced a distribution deal with HP, the world's largest PC manufacturer, to install a Live Search-enabled toolbar on all HP consumer PCs planned to ship in the United States and Canada, beginning in January 2009.

We look forward to sharing more milestones and details on our plans as we head to MGX (the company's annual sales conference) and our Financial Analyst Meeting in July.

I remain confident in our assets, plans and people to succeed in building our online business. Thanks again for your commitment and focus.

Regards, Kevin

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About the author

    During her years at CNET News, Ina Fried has changed beats several times, changed genders once, and covered both of the Pirates of Silicon Valley. These days, most of her attention is focused on Microsoft. E-mail Ina.

     

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