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Yahoo to Microsoft: Price must be right

Responding to Microsoft's Saturday ultimatum, Yahoo says it won't be bought "for anything less than (our) full value."

Below is the edited text of a letter sent by Yahoo CEO Jerry Yang and Chairman Roy Bostock to Microsoft CEO Steve Ballmer on Monday.

Dear Steve:

Our board has reviewed your most recent letter with regard to the unsolicited proposal you made to acquire Yahoo on January 31, 2008.

Our board carefully considered your unsolicited proposal, unanimously concluded that it was not in the best interests of Yahoo and our stockholders, and rejected it publicly on February 11, 2008.

Our board cited Yahoo's global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as its substantial unconsolidated investments, as factors in its decision.

At the same time, we have continued to make clear that we are not opposed to a transaction with Microsoft, if it is in the best interests of our stockholders. Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders.

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Since disclosing our board's position with respect to your proposal, we have presented our three-year financial and strategic plan to our stockholders, which supports our board's determination that your unsolicited proposal substantially undervalues Yahoo. Those meetings with our stockholders have also provided us an opportunity to hear their views.

We have continued to launch new products and to take actions which leverage our scale, technology, people, and platforms, as we execute on the strategy we publicly articulated. Today, in fact, we are announcing AMP from Yahoo, a new advertising management platform designed to dramatically simplify the process of buying and selling ads online.

Finally, our board has been actively and expeditiously exploring our strategic alternatives to maximize stockholder value, a process which is ongoing. All of these actions have been driven by our overarching commitment to maximize stockholder value.

Our board's view of your proposal has not changed. We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders. Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo. Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal.

In contrast to your assertions about the effect of general economic conditions on our business, Yahoo's business forecasts are consistent with what we outlined in our last earnings call.

As you know, we recently reaffirmed our Q1 and full-year guidance, which is a testament to our ability to perform in line with our expectations despite the current economic environment.

In addition, our three-year financial and strategic plan, which we have made public, demonstrates significant potential upside not previously communicated to the financial markets. This plan has received positive feedback from our stockholders, further strengthening the view that Yahoo is worth well more as a standalone company than the value offered in your proposal, and would be even more valuable to Microsoft.

Your own statements have made clear the strategic importance of Yahoo's substantial assets and capabilities to Microsoft.

We regret to say that your letter mischaracterizes the nature of our discussions with you. We have had constructive conversations together regarding a variety of topics, including integration and regulatory issues.

Your comment that we have refused to enter into negotiations to conclude an agreement are particularly curious, given we have already rejected your initial proposal, nominally $31 per share at the time, for substantially undervaluing Yahoo, and your suggestions in your letter and the media that you are considering lowering the value of your proposal. Moreover, Steve, you personally attended two of these meetings and could have advanced discussions in any way you saw fit.

As to antitrust, we have discussed with you our concerns. Any transaction between us would result in a thorough regulatory review in multiple jurisdictions. As a follow-up to a recent meeting among our respective legal advisers, we had on this topic, and at your request, we provided to you on March 28 a list of additional information we would need to further our understanding of the regulatory issues associated with any transaction. To date, you have still not provided any of the requested information.

We consider your threat to commence an unsolicited offer and proxy contest to displace our independent board members to be counterproductive and inconsistent with your stated objective of a friendly transaction. We are confident that our stockholders understand that our independent board is best positioned to objectively and knowledgeably evaluate our company's alternatives and to maximize value.

In conclusion, please allow us to restate our position, so there can be no confusion. We are open to all alternatives that maximize stockholder value. To be clear, this includes a transaction with Microsoft, if it represents a price that fully recognizes the value of Yahoo on a standalone basis and to Microsoft, is superior to our other alternatives, and provides certainty of value and certainty of closing.

Lastly, we are steadfast in our commitment to choosing a path that maximizes stockholder value, and we will not allow you or anyone else to acquire the company for anything less than its full value.

Very truly yours,

Roy Bostock, chairman of the board

Jerry Yang, chief executive officer