Microsoft officially announced (May 3, 2008) that it withdraws the proposal to purchase Yahoo. Because trading opened just Monday (announcement was made on Saturday) Yahoo feels now the wrath of its investors as the share price dropped by 22% in premarket. Even if it recovered a little it still currently faces a 15% drop compared to its share price on Friday, analysts expecting to see a 50% drop in share price (about how much it gained since Microsoft made public its intentions to buy it).
Microsoft warned about a possible hostile takeover a while ago, but that idea seems to have been dropped and one of the reasons Microsoft withdrew its bid is the partnership Yahoo made with Google to offer its search results. So what will happen next? Investors are still unsure if they should sell, buy, or keep their shares and trust Yahoo's decisions, but reading through the lines of the letter Microsoft CEO Steve Ballmer sent to to Yahoo's CEO Jerry Yang you can sense a possible legal battle, as through their search advertising partnership, Yahoo and Google will have more than 70% of the search advertising market making them targets for possible antitrust trials. Quoting the most important part of this letter:
We regard with particular concern your apparent planning to respond to a “hostile” bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons:
• In addition, it would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.
• This would also effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.
• It could foreclose any chance of a combination with any other search provider that is not already relying on Google’s search services.
Good luck Yahoo, you'll need it.
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