Microsoft has officially withdrawn its bid to acquire Yahoo in a letter that Microsoft’s CEO Steve Ballmer sent today to Yahoo’s Jerry Yang.

In a final meeting that took place today between Jerry Yang and David Filo from Yahoo and Steve Ballmer and Steve Johnson from Microsoft, Yahoo stated that the lowest price they would accept was $37 per share and Microsoft reported that they would not go over $33 a share. The offer was withdrawn shortly after during a phone call conversation between the CEOs.

Letter from Steve Ballmer to Jerry Yang:

May 3, 2008

Mr. Jerry Yang
CEO and Chief Yahoo
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Jerry:

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 favour 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.

Sincerely yours,
/s/ Steven A. Ballmer

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

Press Release:

REDMOND, Wash., May 3 — 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.

Yahoo has announced the acquisition of online advertising network BlueLithium for $300 million in cash.

Blue Lithium specializes in selling performance-based display ads across a network of Web sites. Like search-related text advertising, performance banners let advertisers pay for exposure to customers only when people respond to the ad, whether it’s by agreeing to receive more information or by taking some action. The privately held company, which also sells behavioral targeted advertisiments, is ranked the fifth largest ad network in the United States and second largest in the United Kingdom with 145 million unique visitors per month.

The acquisition of BlueLithium enables Yahoo! to accelerate its advertising, product, and engineering roadmaps, and gives the company increased capabilities to sell and measure performance-based campaigns both on and off the Yahoo! network.

BlueLithium and Yahoo! share a common goal of providing both advertisers and publishers with high quality inventory and the essential targeting and analytical tools that are necessary to reach the right consumers at the right times. The addition of BlueLithium is the logical next step in creating the largest and most effective online ad network globally, which also includes inventory on Yahoo!’s owned and operated properties, the Yahoo! Publisher Network, and the Right Media Exchange. We believe that together Yahoo! and BlueLithium will help drive the next evolution of the online advertising industry. [BlueLithium]

The deal comes five months after Google bought online ad giant DoubleClick for $3.1 billion and less than four after Microsoft acquired aQuantive for $6.1 billion.

Jimmy Wales, the founder of the popular Internet encyclopaedia Wikipedia, has revealed more details about the development of his new for-profit search engine Wikia. During the O’Reilly Open Source Convention (OSCON) held in Portland, Jimmy Wales announced the acquisition of from search engine LookSmart and the release of the software under open source.

Grub, a distributed search spidering technology, will enable Wikia to index the millions of websites on the internet.

“We’ve had a tremendous response from very interesting commercial players in the search space,” said Jimmy Wales, co-founder and chairman, Wikia, Inc. “The desire to collaborate and support a transparent and open platform for search is clearly deeply exciting to both open source and businesses. Look for other exciting announcements in the coming months as we collectively work to free the judgment of information from invisible rules inside an algorithmic black box.” [Wikia]

LookSmart will be providing text and display ads in Wikia’s free wiki communities and eventually on the Search Wikia site, Wales said. Wikia will sell ads a cost-per-click (CPC) or cost-per-thousand (CPM) models. Unsold inventory will be back-filled by ads from LookSmart’s distributed ad network.

Microsoft continues to invest in online advertising to be able to compete with major rivals Yahoo and Google. In the last few months, the firm has made three digital acquisitions; first it was European mobile advertising firm ScreenTonic, then big aQuantive for $6 billion (Microsoft’s biggest acquisition in history) and now online advertising exchange firm AdECN. According to Microsoft, AdECN would add the final element to its online advertising portfolio.AdECN is a real-time, auction-based, marketplace for buying and selling display advertising. It is similar to that offered by Right Media, the firm Yahoo acquired last April for more than $680 million.

“It works much like a stock exchange. A member of the AdECN Exchange buys on the exchange for its advertisers and sells on the exchange for its publishers. This guarantees members the best possible liquidity – fewer campaigns go unfilled, less inventory goes unsold – and more liquidity means higher revenues.The member’s advertisers and publishers benefit, too, from the extreme targeting and impression-based pricing in the AdECN Exchange, which helps members attract and retain the best clients.” [AdECN]

Founded in 2003, and with nearly 30 employees, AdECN brings new capabilities and expertise to Microsoft’s online advertising network AdCenter.

Second largest social networking site, Facebook, has bought Parakey, a startup run by two engineers who helped create Mozilla’s Firefox open source browser. This represents the company’s first acquisition in three years of history.

Parakey is a platform for building applications that merge the best of the desktop and the Web. Like desktop applications, these applications work offline, offer more privacy than pure websites, run quickly, and integrate with your computer and its devices. But like Web applications, they are also more creative, visually alluring, accessible from anywhere and potentially accessible by anyone. In short, Parakey apps are designed to be both useful and social, a combination that is too rare today. [Parakey]

Facebook’s acquisition of Parakey is a clear indicator of Facebook’s CEO (23-year old Mark Zuckerberg) intention of keep building the company instead of selling to potential acquirers. One year ago, Yahoo offered $1 billion for the firm, and was rejected right away… today some sources from the Deal indicated that Peter Thiel, a Facebook director who is president of hedge fund Clarium Capital Management LLC and managing partner of VC firm Founders Fund Management LLC, estimates it would command a price tag between $7 billion and $10 billion.

Facebook ranks among the fastest growing websites of the moment, and its growth potential is undeniable. However, it is difficult to estimate the real value of a firm which has not yet clearly developed its business model.

The firm might either end up being acquired by a tech giant or going public some months from now… time will tell. We will keep an eye on Facebook’s promising future.