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Business Impact

Yahoo shares fall 19.7 pct as Microsoft withdraws $44B bid

Yahoo shares fell 14 percent Monday as hopes for the once-dominant Internet icon dimmed following Microsoft’s withdrawal of a $47.5 billion takeover bid.

The sell-off wiped out nearly half the gain in Yahoo Inc.’s stock price since Microsoft Corp. made its initial offer on Jan. 31 in an effort to challenge online advertising and search leader Google Inc. The downturn left Yahoo’s market value about $13 billion below Microsoft’s last offer.

Last-ditch talks between Yahoo and Microsoft were fruitless, leading Microsoft to walk away from a deal Saturday.

In early-afternoon trading Monday, Yahoo shares shed $4.04, or 14.1 percent, to $24.63, below Friday’s close of $28.67, when investors were still hopeful about a deal.

Despite the backlash, analysts doubt Yahoo shares will fall back to their $19.18 pre-bid price, partly because some investors may still be holding out hope that the software maker will renew its takeover attempt if Yahoo continues to struggle.

Microsoft shares rose less than 1 percent, or 18 cents, to $29.42. The shares had declined 10 percent to $29.24 since the bid, reflecting concerns that the proposed marriage would turn into a complicated mess that would enable Google to grow even stronger.

Shares in Google went up nearly 2 percent, or $9.49, to $590.78. The company not only averted a marriage it had fiercely objected but also began discussions that could lead to a long-term advertising partnership with Yahoo, a deal made more likely with Microsoft’s withdrawal. Any Google-Yahoo alliance, though, would likely face antitrust hurdles.

Yahoo Chief Executive Jerry Yang remained convinced that the company he started in a Silicon Valley trailer 14 years ago, was worth more than the money Microsoft had offered.

Now he may only have a few months to convince Wall Street that his rebuff of Microsoft’s takeover bid was a smart move – and if he can’t, analysts won’t be surprised if Yang is either replaced as CEO or forced to consider accepting a lower offer if Microsoft comes knocking at his door again.

”This squarely puts the pressure on Jerry Yang to deliver results and shareholder value,” Standard & Poor’s equity analyst Scott Kessler said. ”You are going to see a lot of shareholders just throwing in the towel because they are going to realize it’s going to take awhile for the stock to get back to where it was Friday.”

In a posting Sunday night on Yahoo’s blog, Yang welcomed the added pressure. ”We know the spotlight will probably stay on us for a while,” Yang wrote. ”That’s fine – we have a clear path ahead and momentum to build on.” He added the Microsoft saga had turned Yahoo into ”a stronger, more focused company with an even greater sense of purpose.”

Yahoo shares finished last week at $28.67, slightly less than the $29.40 per share that Microsoft was offering before Chief Executive Steve Ballmer agreed to raise the offer to $33 per share in a last-ditch effort to get a deal done.

Disillusioned shareholders are bound to question whether the rejection of Microsoft’s sweetened offer was driven more by emotion and ego than sound business sense.

”Clearly there’s frustration,” said Darren Chervitz, co-manager of the Jacob Internet Fund, which owns Yahoo stock. ”I am not even sure if Yahoo cares about its shareholders because they didn’t show much regard for shareholders’ best interests in this process.”

In his blog posting, Yang defended the board’s handling of the Microsoft bid and branded some of the criticism as ”a lot of nonsense and misinformation.”

”We clearly indicated to Microsoft that we were open to a transaction but only if it were on terms that fully recognized the value of Yahoo and was in the best interests of our stockholders,” Yang wrote.

Accompanied by fellow Yahoo co-founder David Filo, Yang flew to Seattle on Saturday to inform Ballmer that the company wouldn’t sell for less than $37 per share – a price that Yahoo’s stock hasn’t reached since January 2006.

To win the faith of shareholders, Yang will have to execute a turnaround plan that he began drawing up nearly a year ago after he replaced Terry Semel as CEO amid shareholder angst about the company’s financial malaise.

Ballmer also will be under the gun to prove he can come up with another way to challenge Google’s dominance of the Internet’s lucrative search and advertising markets.

The unsolicited bid was widely seen as Ballmer’s admission that Microsoft needed Yahoo’s help to upgrade its unprofitable Internet division.

Analysts now expect Ballmer to use the money he had earmarked for the Yahoo acquisition to explore other possible deals with large Internet companies like Time Warner Inc.’s AOL and News Corp.’s MySpace and promising startups like Facebook Inc. and LinkedIn Corp. Microsoft already owns a 1.6 percent in Facebook, the second-largest social network behind MySpace.

But Ballmer is unlikely to be under as much duress as Yang, 39, who has promised that Yahoo’s development of a more sophisticated and far-flung Internet advertising platform will produce net revenue growth of at least 25 percent in 2009 and 2010.

That would be a dramatic improvement, considering that Yahoo’s revenue rose by 12 percent last year and is expected to grow at about the same pace this year.

Analysts, though, are skeptical about whether Yahoo will be able to hit those targets, raising the chances for a shareholder rebellion if the company stumbles in the next two quarters – a distinct possibility if advertisers curtail spending in a shaky U.S. economy, as many analysts fear.

To help boost its short-term profits and its stock price, Yahoo is widely expected to form a long-term advertising partnership with Google.

Although the final details are still being ironed out, Yahoo wants to hire Google to place some of the text-based ads that appear alongside the search results on its Web site. It’s a task that Google already handles for scores of Web sites, including AOL and Ask.com.

But turning to Google for help would be a humbling step for Yahoo after spending more than $2 billion to acquire and build its own technology.

An alliance between Google and Yahoo also would face antitrust hurdles because the two companies combined control more than 80 percent of the U.S. search advertising market.

Yahoo also has been exploring a possible merger with AOL’s Internet operations but may now have to contend with a competing offer from Microsoft.

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