At Microsoft's annual shareholders meeting, Mr. Ballmer said the Redmond, Wash.-based company has no intention of renewing its bid for Yahoo, now that Jerry Yang, who rebuffed Mr. Ballmer's overtures earlier this year, is stepping down as CEO.
"Let me be clear as I've tried to be publicly, we are done with all acquisition discussions with Yahoo," Mr. Ballmer said, according to Reuters. "We thought we had something that made sense. [It] didn't make sense to them. We've moved on."
Mr. Ballmer's comments sent Yahoo's shares down 15%, reversing the stock spike after Mr. Yang announced his departure on Monday, leading to some renewed hope on Wall Street that Microsoft would revive its bid for the company. Microsoft bid $33 a share for the company last spring; its shares now trade under $10.
While Mr. Ballmer's comments narrow the options for Yahoo's new CEO, they do open a new door, a potential alliance of two search also-rans to create a stronger competitor against Google. "There are no active discussions on that front, but we'd be very open to it," Mr. Ballmer said.
Yahoo spent the better part of a year negotiating and then attempting to win federal regulatory blessing for its own search deal, which would have allowed Yahoo to show Google's ads next to its search results.
That deal was met with strong advertiser opposition over fears that it would lead to keyword price inflation. But a similar deal with Microsoft would face less advertiser blowback.
Why go against Google?
Yet some critics of Yahoo management have argued that the company should stop attempting to battle Google in search and instead focus on its display ad business.
"My view is they should have dropped search a long time ago," said Mike Leo, CEO of Operative, which manages online ad sales for publishers. "Business is riddled with companies fighting battles they've already lost."
But Yahoo earns more revenue from search ($439 million in the third quarter) than it does from display advertising on its own sites ($435 million). Yahoo management and some advertisers argue that a key part of Yahoo's appeal is that it can package both search and display for large marketers.
"There's a benefit to the advertiser in having search, display, direct response and video in one place," said Joanne Bradford, Yahoo senior VP-U.S. revenue and market development.
"I believe that search is a long-term battle, and innovation can come in many different ways. If anyone can do it, it will be Yahoo," she said.
Yet the fight for market share will be tough in 2009; market research firm eMarketer is predicting Yahoo ad revenue will grow a mere 1.4% in 2009 to $3.55 billion, compared to 14.6% at Google. Google will take 33% of all U.S. online ad spending in 2009, compared to 13.8% for Yahoo.
Yahoo sales executives have met with all the big agency holding companies all this week; Mr. Yang even paid a visit to one, something he's expected to do more of after he steps down as CEO.