Mr Ballmer said Microsoft had raised its original offer from $44.6bn to $47.5bn (£24.1bn) - $33 per share. But he added that Yahoo had insisted on at least $53bn, or $37 a share - more than Microsoft was prepared to pay.
The software giant had wanted to do a deal to be able to compete with Google, which dominates the lucrative market for internet advertising.
Microsoft's Press Release:
Microsoft Corp. (NASDAQ: MSFT) today announced that it has withdrawn its proposal to acquire Yahoo! Inc. (NASDAQ: YHOO).
''We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo! and the market as a whole. Our goal in pursuing a combination with Yahoo! was to provide greater choice and innovation in the marketplace and create real value for our respective stockholders and employees,'' said Steve Ballmer, chief executive officer of Microsoft.
''Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer. After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal'', said Ballmer.
''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. While Yahoo! would have accelerated our strategy, I am confident that we can continue to move forward toward our goals,''Ballmer said.
''We are investing heavily in new tools and Web experiences, we have dramatically improved our search performance and advertiser satisfaction, and we will continue to build our scale through organic growth and partnerships,'' said Kevin Johnson, Microsoft president for platforms and services.
Below is the text of the letter from Microsoft CEO Steve Ballmer to Yahoo! CEO Jerry Yang.
May 3, 2008
Mr. Jerry Yang CEO and Chief Yahoo Yahoo! Inc. 701 First Avenue Sunnyvale, CA 94089
After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo!.
I first want to convey my personal thanks to you, your management team, and Yahoo!?s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.
I am disappointed that Yahoo! has not moved towards accepting our offer. I first called you with our offer on January 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62 percent premium at that time reflected the strength of these convictions.
In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.
Also, after giving this week?s conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders. This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.
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 fundamentally undermine Yahoo!?s own strategy and long-term viability by encouraging 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. This would undermine the reliance on your display advertising business to fuel future growth.
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. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.
This would also effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.
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!.
We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners.
I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table.
But clearly a deal is not to be.
Thank you again for the time we have spent together discussing this.
Steven A. Ballmer Chief Executive Officer Microsoft Corporation
Yahoo's Response to Microsoft:
Roy Bostock, Chairman of Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company issued the following statement today in response to Microsoft Corporation's announcement that it has withdrawn its proposal to acquire Yahoo!:
"We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo! for success and leadership in its markets. From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view. Yahoo! is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market. Our solid results for the first quarter of 2008 and increased full year 2008 operating cash flow outlook reflect the progress the company is making. Today, Yahoo! has:
-- a refined strategic focus to drive enhanced volume and yield;
-- reorganized to focus its efforts on its most promising products and services;
-- invested in innovations designed to revolutionize display advertising and facilitate closing the competitive gap in search; and
-- enhanced expense and resource management to support improved profitability."
Jerry Yang, co-founder and chief executive officer, Yahoo! Inc. added, "I am incredibly proud of the way our team has come together over the last three months. 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."
While Microsoft may be considered the loser in this acquisition battle, the winner clearly is not Yahoo. Yahoo has been losing search share for at least two years to Google and has shown no signs that it can reverse that trend. According to Nielsen Netratings, Google held a 58.7% share in March of this year, up from 53.7% in March 2007 and 49.0% in March 2006. Yahoo is currently estimated to hold an 18.1% share, down from 21.8% last year and down from 22.0% in 2006. Microsoft?s MSN/Live Search is listed with a 12.0% share, up from 10.1% in 2007.
It remains to be seen if Yahoo can survive by being squeezed by two giants and whether Microsoft will find ways to accelerate its growth to eventually surpass Yahoo and catch up with Google. Yahoo itself is likely to need a strong partner to survive this battle and there clearly aren?t many companies that could afford to purchase the company and live with the corporate culture of the company.
The clear winner appears to be Google. It will take time until significant change in the search and Internet advertising market can be expected. At least for now, Google can continue to build and expand its search advertising business without having to expand much headwind from either Microsoft or Yahoo ? or anyone else. For the sake of competition, that may not be the best outcome for the industry, web publications and the consumer.