Microsoft walks away, Yahoo looks at options

Yahoo's shares fell 21 per cent today, as the web search engine faced mounting pressure to find an alternative strategy to Microsoft's $47.5 billion (£24.1 billion) takeover offer after the software maker walked away over a disagreement on price.

Microsoft on Saturday sweetened its initial $31-per-share offer for Yahoo to $33, but then withdrew from the talks when Yang dug in for a price of $37.

Yahoo chief executive Jerry Yang maintains that even the higher offer did not value Yahoo properly for its investment in search technology, its prominence in online display advertising and other assets. On Sunday, he sought to shore up that sentiment among employees.

"We have a spirit and a culture that is uniquely Yahoo," Yang said in an email to staff that was viewed by Reuters. "Staying true to who we are has helped us pull through the recent uncertainty we've faced."

While some Yahoo investors hoped it could wrest a price of $35 per share from Microsoft, a dissident shareholder said he would challenge Yang and the board over the collapse of talks.

"Shareholders didn't even get a chance to vote on the deal, but the board negotiated on our behalf and not in good faith," Eric Jackson, who leads a group of investors who collectively own two million Yahoo shares, told Reuters.

He said he would urge shareholders to withhold votes from the company's directors this year.

Yang and the company he helped create could face a flood of shareholder lawsuits or other actions if nothing materializes.

Yahoo is likely to push for an advertising partnership with web search leader Google, sources familiar with the matter said. A tie-up with Google, seen as a big winner from the end of Microsoft-Yahoo talks, should help boost Yahoo's operating performance in the near term.

"There are two things that could support the stock: the potential for Microsoft to return and the potential to do a Google deal," said Clayton Moran, analyst at Stanford Group.

"It's time to get a move on with Google," said Jeffrey Lindsay, analyst with Sanford C. Bernstein. "Let's hope they weren't bluffing."

Microsoft's chief executive Steve Ballmer portrayed Yahoo's options as particularly stark in a letter to Yang detailing his reasons for pulling back, and suggested any Google tie-up would preclude a Microsoft deal.

Ballmer also warned Yahoo that it would give up its relationship with advertisers by coordinating with Google and could lose some of its best engineering talent.

Microsoft and Google are increasingly competing on the same turf, such as web-based applications, email and messaging. The proposed Yahoo purchase was meant to create a fiercer rival to Google and challenge its hold on Internet advertising.

"The real winner in all of this seems to be Google," said Canaccord Adams analyst Colin Gillis. "There's going to be no powerful number two" in the web market, he said.

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