Microsoft: Yahoo Turned Down $9 Billion Investment
Microsoft Corp said Friday its latest offer to Yahoo included $9 billion in cash and an additional $1 billion a year in operating profit.
In an email to employees, Kevin Johnson, president of Microsoft’s platforms and services, wrote that the company had offered $8 billion for a 16 percent stake in Yahoo and $1 billion to acquire Yahoo’s search business.
The proposal also involved a revenue-sharing relationship that would have contributed an additional $1 billion a year in operating income to Yahoo, due in part to a three-year guarantee of better rates for advertisements linked to Microsoft’s search results rather than Yahoo’s current Panama system.
Microsoft’s latest offer was an alternative to its previous bid for a full acquisition of Yahoo. Instead, Yahoo announced on Thursday it was entering an agreement with Google Inc.
A Reuters report quoted a source familiar with Microsoft who said the software firm remains open to discussing alternative deals with Yahoo, despite its partnership with Google. Both Yahoo and Microsoft had no comment on the matter.
Another Reuters source familiar with the matter said Microsoft’s proposal involved a 10-year arrangement in which it would exclusively handle Yahoo’s search advertising, guaranteeing higher ad rates for only three of those years. Johnson’s e-mail referred to the deal as “long term”, but did not disclose a specific duration.
Yahoo’s non-exclusive arrangement with Google creates a scenario in which the two companies’ ads are competing against each other in an auction. The deal allows other companies to join in the auction and bid to place ads next to Yahoo’s search results.
"Unfortunately Yahoo has chosen a different course, and yesterday announced an agreement that would start to consolidate over 90% of the paid search advertising market in Google’s hands," Johnson said in the e-mail.
"This will make the market far less competitive."
Yahoo said its deal with Google will increase cash flow by $250 – $450 million within 12 months, less than half the forecasted $1 billion additional operating income from the Microsoft offer.  Microsoft said the incremental income in its proposal were from a reduction of Yahoo’s operating costs for running search and from large traffic acquisition cost (TAC) payments Yahoo would receive from Microsoft.  Also, Yahoo would no longer have to invest heavily in research and development for search, Microsoft said.
"On the surface, it looks like a better deal," David Mitchell Smith, an analyst with Gartner, told Reuters, speaking of Microsoft’s search deal offer.
However, there may have been issues not disclosed publicly that made the Google deal more attractive, Smith said.
After months of negotiations, Microsoft abandoned its full acquisition offer for Yahoo in May, making it now doubtful that any acquisition could complete regulatory review during the Bush administration, the Reuters source said.
If the full acquisition could not win approval by the end of the year, the regulatory review process could have carried on through October 2009. That would mean Microsoft would carry the capital risk of a $40-billion acquisition for 18 months.
According to the source, the company also became less interested in a full acquisition after Yahoo’s search share continued to decline more than Microsoft anticipated.  A generous severance agreement established by Yahoo’s management also made a full acquisition less attractive, the source said.
Microsoft’s latest proposal was structured to focus solely on search, based on Yahoo’s concerns that combining both companies’ e-mail and instant messaging would not win regulatory approval, the source added.
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