Yahoo had opposed the offer, believing Microsoft's bid undervalued its assets. Microsoft raised its initial of $31 per Yahoo share to $33 a share, essentially increasing its bid by $5 billion, but Yahoo continued to seek a higher price. Microsoft CEO Steve Ballmer said the economics no longer made sense beyond its offer.
Microsoft's withdrawal will most certainly send Yahoo's stock price lower but how low remains to be seen. Microsoft's own stock price has fallen since its offer to acquire Yahoo.
Can move forward
Yahoo, responding to the news, said it could now move forward on its strategy without the distraction of an ongoing takeover bid.
"I am incredibly proud of the way our team has come together over the last three months," CEO Jerry Yang said in a statement. "This process has underscored our unique and valuable strategic position. With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users."
In recent weeks Microsoft's public statements had started to suggest its advertising ambitions could be met even without acquiring Yahoo. Mr. Ballmer reiterated that point in a statement announcing his decision to abandon the bid.
"We have a talented team in place and a compelling plan to grow our business through innovative new services and strategic transactions with other business partners," he said. "While Yahoo would have accelerated our strategy, I am confident that we can continue to move forward toward our goals."
Yahoo, for its part, has been scrambling to come up with potential alternatives to a Microsoft takeover, including exploring partnerships with Time Warner that would combine its AOL unit with Yahoo, and a search partnership with Google in which Google would help monetize some of Yahoo's search traffic, under the assumption that Google's superior search-optimization system would drive better returns for Yahoo. (Yahoo recently tested out such a Google partnership using a small portion of its search traffic and hailed the test as a success.)
From Ballmer, to Yang
Over the past few months Mr. Ballmer and Yahoo's Mr. Yang and Chairman Roy Bostock have traded public barbs. On Saturday, Mr. Ballmer sent a letter to Mr. Yang thanking him for considering the offer and the time he personally put into the process. He also spent much of the letter emphasizing his "particular concern" of Yahoo's search partnership with Google.
He said it would undermine Yahoo's long-term strategy because it would encourage advertisers to use Google's search ad-buying system; it would reduce Yahoo's ability to retain talented engineers; it would expose Yahoo to a host of potential regulatory concerns that no suitor would want to inherit; and it would give Google greater leverage to control search-advertising pricing.