Microsoft Withdraws Proposal to Acquire Yahoo!

Microsoft Corp. today announced that it has withdrawn its proposal to acquire Yahoo! Inc.

Microsoft Corp. (NASDAQ: MSFT) today announced that it has withdrawn its proposal to acquire Yahoo! Inc. (NASDAQ: YHOO).

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

“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.

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

Dear Jerry:

over three months, we have reached the conclusion of the process
regarding a possible combination of Microsoft and Yahoo!.

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

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.

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.

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:

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.

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.

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.

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.

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

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.

Sincerely yours,

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

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