Microsoft Increases Yahoo Bid, Yanks It Following Yahoo Refusal

Microsoft, deciding not to make a direct offer to Yahoo shareholders for the company, has officially pulled its bid of $33 a share. The company had upped the bid from $31, but Yahoo had been holding out for at least $37 a share.

A protracted proxy contest and eventually an exchange offer would be required, were Microsoft to make a direct offer to shareholders. “Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft,” wrote Microsoft chief Steve Ballmer in a letter to Yahoo CEO Jerry Yang (via CNet News).

The unexpected decision will put pressure on both companies. Yahoo’s largest shareholders have criticized both sides for failing to reach an agreement on a deal that would have given them a big gain and given Microsoft a leg up in its competition with Google, writes the Financial Times.

A portfolio manager at Legg Mason, which owns 6 percent of Yahoo’s stock, called on the company to mount an immediate stock buy-back worth at least $4 billion, to show confidence in its shares. The manager, Bill Miller, says that the companies had the opportunity to conclude an offer that represented a 70 percent premium to the share price before Microsoft made its offer, but “both sides missed it. Yahoo’s management now is in a really difficult position - they have to prove they can get that value back to $37,” he says.

Miller’s strongest criticism, however, is for Microsoft, which now faces being a distant third online, rather than increasing its offer by a relatively small amount - that is, about $5 billion.

Microsoft’s refusal to remain at the table with Yahoo could simply be a stance taken in the hopes of getting shareholders to put pressure on Yang to reconsider his $37 line in the sand.

A deal between the two would have reshaped the internet landscape. Now they must prove that they can make substantive changes on their own. As both companies look for new ways to boost business, expect fresh rounds of talks between some of the biggest players in the internet industry, say analysts and investors.

“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,” stated Yang (via MarketingVox).

Yang considers the formal withdrawal of Microsoft’s takeover bid - after threats that Ballmer would go so far as to oust Yahoo’s board to win the company - as a “personal victory,” according to one person who spoke to him, writes The New York Times.

Yahoo is currently in talks with Google for a sponsored search deal.