A stunning development in the game of chicken that Yahoo was playing with Microsoft. After high-level acquisition discussions broke down today, Microsoft closed its collective briefcase, withdrew its offer to acquire Yahoo, and went home. Deal or no deal? No deal.

While most observers are citing price as the issue (Microsoft upped their bid to $33 a share; Yahoo wanted $37), a bigger issue appears to be Yahoo CEO Jerry Yang’s tactic of cozying up to Google as a way to fight a potential hostile takeover. This drew half of all the text in Microsoft CEO Steve Balmer’s withdrawal letter to Yang:

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:

· First, it would…(encourage)…advertisers to use Google as opposed to your Panama paid search system. This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them…

· Given this, it would impair Yahoo’s ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.

· In addition, it would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit…

· This would also effectively enable Google to set the prices for key search terms on both their and your search platforms…

· It could foreclose any chance of a combination with any other search provider that is not already relying on Google’s search services.

Accordingly, your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!.

This is going to be THE big story over the next few days, as people in the know delve into the facts, but the real thing to watch will be the stock prices of both companies come this time Monday. Yahoo’s is likely to tank, which will mean lawsuits from every direction. Hell, in a few days, $33 a share may begin to look like a lot of money.

(Kudos to Michael Arrington, who appears to have broken the story AllthingsD, who broke the story. Thanks, Dale.)

This entry was posted on Saturday, May 3rd, 2008 at 8:38 pm and is filed under Legal. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.