Yahoo's Yang and Bostock Explain Their Google-Microsoft Decision, Ask For Your Vote

In a direct appeal to Yahoo (YHOO) shareholders, Jerry Yang and Roy Bostock explain why they took the Google search deal over the Microsoft alternative. They also point out that Carl Icahn has no clue what to do with the company now that Microsoft no longer wants to buy it. They therefore urge you to vote for them at the upcoming shareholder meeting, instead of Carl.

On the Icahn point, we agree: Carl made a big bet and lost. Better to stick with a management team that has a plan (however fecklessly it has been delivering on it) than decapitate the company without a specific replacement and strategy in mind.

On the Google vs. Microsoft deal, most of this ground has already been plowed, but there are a couple of new nuggets:

First, on that old topic, the acquisition:

Microsoft stated unequivocally that it has no interest in acquiring all of Yahoo!, even at the price range Microsoft had previously suggested.

Note the word “range.” It has been reported that a desperate Yahoo asked Microsoft if it was interested in buying the company at the original $31 price (the one Yahoo rejected for months), and Microsoft said “no.” This would seem to confirm that story (and show just how badly Yahoo blew the original Microsoft offer).

Second, on the search proposal, Yahoo reveals the following:

  • The search deal would have given Microsoft veto rights on certain future Yahoo! actions, including a sale of Yahoo!
  • The board and its advisers also carefully studied the financial impact of Microsoft’s proposal and concluded that it would have provided no meaningful improvement to our operating cash flow.

You’ll recall that in the immediate aftermath of the deal, sources familiar with Microsoft’s thinking told everyone that its plan would have delivered $1 billion of additional cash flow to Yahoo. Sources familiar with Yahoo’s thinking, meanwhile, said this was “a made up number.” Here, Yahoo says the deal would have contributed ZERO to Yahoo’s cash flow. Which makes Yahoo’s decision to pass on it even more understandable.

If it is true that Yahoo and Microsoft are now discussing a search deal again, we think the only reason for Yahoo to listen would be that Microsoft significantly improved its search proposal.

See Also: Why Yahoo Took the Google Search Deal Instead of Microsoft’s

Full Jerry/Roy letter below:

SUNNYVALE, Calif.–(BUSINESS WIRE)–Yahoo! Inc. (Nasdaq:YHOO – News), a leading global Internet company, today sent the following letter to all stockholders from Chairman Roy Bostock and CEO Jerry Yang.

June 25, 2008

Dear Fellow Stockholders:                    
We are writing to update you on the latest developments here at Yahoo!, including our recently announced commercial agreement with Google and the outcome of our discussions with Microsoft regarding a potential transaction.

On June 12, we announced a non-exclusive agreement with Google that we expect will generate approximately $250 to $450 million in incremental operating cash flow for Yahoo! in the first twelve months following implementation. This cash flow will enhance our profitability as well as help support achievement of our key strategic objectives. Combined with continuing advances in our own search capability, the agreement is an important step in our efforts to capitalise on the high-growth online advertising opportunities where we are best positioned to compete successfully and create more value.
Let us explain why we find this new agreement so exciting.

The Yahoo!-Google Agreement is Financially Attractive and Strikes the Right Strategic Balance.

Under the agreement with Google, Yahoo! will continue to provide algorithmic and sponsored search results, but now will also have the ability to run sponsored search ads supplied by Google alongside Yahoo!’s search results. Advertisers will pay Google directly for each click on Google paid search results appearing on Yahoo!. Google will then pay us a fee (in industry jargon, traffic acquisition cost) based on revenue realised from click-throughs on ads supplied to Yahoo! by Google.

This carefully structured agreement strikes the right strategic balance, enhancing our financial results while advancing our strategic objectives of being the “starting point” for the most users on the Internet and offering such compelling value that advertisers will see us as the “must buy” in online advertising.

One of our key strategies for achieving these objectives is to capitalise on the increasing convergence of search and display advertising, where we are especially well positioned to compete and succeed. We have already accelerated our efforts to strengthen our presence in display through a variety of initiatives and acquisitions in recent months. Our new commercial agreement with Google enhances our ability to pursue this strategy.

Another key strategy is to open our platform to other developers to optimise monetization for our advertisers and publishers and provide the best experience for our users. We see this agreement as a natural extension of the efforts we have already made toward an open marketplace.

The Google agreement is non-exclusive and provides strategic and operational flexibility for Yahoo!. It allows Yahoo! to use Google’s services in those areas where Google monetizes our inventory more effectively but also permits us to continue to use our own search technology in areas where we believe we are most competitive. The net result is that the agreement helps us accelerate one of our strategic aims–closing the monetization gap. At the same time, it allows Yahoo! to continue to compete aggressively in search and display advertising.

Importantly, the agreement does not prevent Yahoo! from pursuing other alternatives that could increase stockholder value. Because the agreement can be terminated by either party upon a change in control, it would not preclude a transaction with Microsoft or any other potential acquiror in the future.

The Yahoo!-Google Agreement Does More for Stockholder Value than Microsoft’s Search-Only Hybrid Proposal.

We also want to update you on the conclusion to our discussions with Microsoft regarding a potential transaction. As we explained in our last letter, our board and management held numerous meetings and conversations with Microsoft about its proposal to acquire Yahoo!, both before and after Microsoft withdrew that proposal on May 3. On June 8, our Chairman, Roy Bostock, other independent board members, and members of Yahoo!’s management team again met in person with Microsoft representatives. At that meeting, Microsoft stated unequivocally that it has no interest in acquiring all of Yahoo!, even at the price range Microsoft had previously suggested.

Microsoft did propose an alternative transaction. Rather than acquire our whole company as it had been proposing for months, Microsoft now proposed to acquire only our search business for $1 billion and a share of future search advertising revenue. This proposal also included an $8 billion investment in Yahoo! but required Yahoo! to commit to a 10-year exclusive arrangement that would have made us dependent on Microsoft for all of our search business. It would also have given Microsoft veto rights on certain future Yahoo! actions, including a sale of Yahoo!. Our board of directors and management made a great effort–and conducted in depth negotiations–to elicit a feasible proposal from Microsoft that made strategic and financial sense for Yahoo!, but without success.

While Microsoft’s search-only hybrid proposal may have been helpful to Microsoft, our board and management concluded it would have had a significant adverse impact on Yahoo! strategically, leaving the Company without the operational control of search assets and technology we view as critical to our objective of becoming a leader in the converging search and display advertising business. The board and its advisers also carefully studied the financial impact of Microsoft’s proposal and concluded that it would have provided no meaningful improvement to our operating cash flow. In short, this proposal would have generated substantially less value for Yahoo! stockholders than Microsoft has suggested.

Based on all the key factors–strengthening our competitiveness, protecting our strategic position, generating attractive financial returns–the Google agreement is far better than Microsoft’s search-only hybrid proposal. That’s why we moved forward with it.

Your Current Board of Directors Has the Knowledge, Experience and Commitment to Best Represent Your Interests and maximise Stockholder Value.

The events of recent weeks underscore the fact that your board of directors is far better qualified to represent your interests in the effort to maximise stockholder value than the slate put forward by Carl Icahn.
Based on Mr. Icahn’s narrow agenda, it seems highly unlikely that either he or his slate would bring added value to Yahoo!. Consider the following:

— Mr. Icahn put forward his slate so as to sell Yahoo! to Microsoft, even though he had no knowledge of the sustained efforts made by your current board and management to determine whether Microsoft was willing to engage in a transaction that would provide appropriate value and certainty of achieving that value. On June 8, Microsoft once again made it perfectly clear that it is not currently interested in acquiring Yahoo!.

— Mr. Icahn publicly opposed any alternative form of transaction with Microsoft. Your board and management, after thorough and deliberate negotiations and evaluation, separately concluded on its own that the alternative hybrid deal proposed by Microsoft was, indeed, not in the best interests of the Company or its stockholders.

— Mr. Icahn urged, as an alternative to a Microsoft transaction, that Yahoo! find a way to partner with Google that would not preclude a transaction with Microsoft in the future. We have done exactly that through the commercial agreement with Google we announced on June 12.

Simply put, you can choose to vote for a slate of nominees with no articulated plan for the future of Yahoo!–and who now have essentially no alternative agenda to offer you–or you can choose to vote for your existing board of directors which has the independence, experience, knowledge and commitment to navigate the Company through the rapidly-changing Internet environment, execute on our strategic objectives and deliver value for Yahoo! and its stockholders.

It is time for Yahoo! to turn its undivided attention to implementing its key strategies, and we therefore urge you to reject Mr. Icahn’s slate and his ill-defined agenda.

We strongly urge you to vote your WHITE Proxy Card today for your current board of directors.

We look forward to sharing our progress with you as we move forward and we thank you for your support.

Roy Bostock    
Chairman of the Board               

Jerry Yang
Chief Executive Officer

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