Page last updated at 07:48 GMT, Sunday, 4 May 2008 08:48 UK

Q&A: Microsoft ends Yahoo bid

Microsoft's CEO Steve Ballmer (file photo)

The software giant, Microsoft, has withdrawn its offer for internet services company Yahoo after the two failed to agree on a price.

The merger of the two companies was designed to tackle a common rival, internet search giant Google.

Now Microsoft says it will go it alone and take on Google all by itself.

Why did Microsoft and Yahoo fail to reach an agreement?

It simply came down to money. Yahoo's bosses argued that Microsoft undervalued their company - even though the offer was raised twice in secret negotiations.

Microsoft had originally offered a 62% premium on Yahoo's share price, based on the day the merger proposal was made. In the end this bid was improved to a 70% premium.

That still wasn't enough for Yahoo's board and management, who argued that their company was on the road to recovery.

There is a suspicion that Yahoo's bosses simply didn't want to do a deal on principle. There has never been any love lost between the two companies.

Demanding a very high price for Yahoo may have been a convenient way of not making the deal happen.

Microsoft chief executive Steve Ballmer, for his part, told his employees on Friday that he "knew exactly" what Yahoo was worth and that he would not pay "a dime above".

What next? I thought Microsoft had threatened a hostile takeover if talks failed?

Yes, that was the original game plan.

Microsoft had warned that it might first lower its offer and then nominate its own candidates to be elected to Yahoo's board at the annual general meeting this summer.

Then it would have been up to Yahoo's shareholders to decide whether they wanted a Microsoft-friendly board in place.

Mr Ballmer now says that this option is "not sensible", because the long fight would allow Yahoo's bosses to "take steps that would make Yahoo undesirable as an acquisition in the first place".

Why did they want to get together in the first place?

I have three words for you: Google, Google, Google.

When the Internet was young, Yahoo was its 800 pound gorilla, and Microsoft - after a false start - managed to acquire silverback status on the web as well.

Google has changed all that. Not even 10 years old - the birthday candles will be blown this September - Google is the one company that has cracked the secret of how to make big bucks on the internet.

Its search engine rules supreme - achieving a market share of more than 80% in regions like Europe. And its search advertising business has turned out to be the world's largest internet goldmine.

As Google spreads the reach of its business, it seriously undermines Yahoo's and Microsoft's sources of internet revenue. Its moves into the field of on-demand software , meanwhile, pose a fundamental threat to Microsoft.

We will probably never know whether a combination of Yahoo and Microsoft would have created a formidable challenge to Google.

But Microsoft's bosses clearly believed that a combination of the two could have done the trick.

What now for Yahoo?

Oh dear, poor Yahoo.

If you are a Yahoo shareholder, then brace yourself to lose quite a hefty chunk of your investment when US stock markets open on Monday. If you work for Yahoo and have stock options, you will be smarting as well.

And if you work for Yahoo's legal team, you may want to get ready for a deluge of lawsuits from enraged shareholders, who have seen a 70% boost to their investment evaporate. There are not many companies in the world who can both afford to buy Yahoo and possibly get the approval of competition watchdogs to do so.

Yahoo's top managers, however, will try to fight back, striking a series of alliances - including with Google, especially on advertising - to find new revenue streams.

And what about Microsoft?

Microsoft dearly wants to catch up with Google, and fast.

Mr Ballmer has now told staff that this is still its ambition.

Together with Yahoo this could have been achieved faster, he says, but he also believes that the world's richest technology company can do it alone - albeit at a somewhat slower pace.

Some of Microsoft's shareholders, though, will breathe a sigh of relief. Not everybody believed that "Microhoo" would have been a success.

Without the albatross Yahoo around its neck, Microsoft's share price should soar.

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