By Daisuke Wakabayashi and Anupreeta Das
In an e-mail to employees, Microsoft platforms and services
division president Kevin Johnson said it had offered $8 billion
for a 16 percent stake in Yahoo and $1 billion to buy Yahoo's
search business and assume its operations.
The proposal also included a revenue-sharing partnership
that would have delivered $1 billion a year in additional
operating income to Yahoo due in part to a three-year guarantee
of better rates for advertisements tied to its search results
than Yahoo's current Panama advertising system.
Microsoft's most recent offer was an alternative to its
previous full acquisition proposal. Instead, Yahoo entered an
advertising agreement with Google Inc on Thursday.
Microsoft, a dominant force in desktop software but a
laggard in online search advertising, is still open to
discussing its alternative proposal despite Yahoo's partnership
with Google, a source familiar with Microsoft's thinking said.
Yahoo had no comment. Microsoft spokesman Jeff O'Mara
declined to comment.
Another source familiar with the matter said Microsoft had
proposed a 10-year exclusive deal to handle Yahoo's search
advertising and only guaranteed higher advertising rates for
three of those years. Johnson's e-mail did not mention the
duration of the deal, only saying it was "long term."
By contrast, Yahoo's deal with Google, which will pit the
two companies' ads against each other in an auction, is
non-exclusive. It means other companies can join in the auction
to bid to place ads next to Yahoo's search results.
"Unfortunately Yahoo has chosen a different course, and
yesterday announced an agreement that would start to
consolidate over 90% of the paid search advertising market in
Google's hands," said Johnson in the e-mail.
"This will make the market far less competitive."
The deal with Google would boost Yahoo's cash flow by $250
million to $450 million in the first 12 months, according to
Yahoo. It would be less than half of Microsoft's forecast for
$1 billion in additional operating income, the source familiar
with Microsoft's thinking said.
A BETTER DEAL?
Microsoft said its proposal would have delivered $1 billion
of incremental operating income to Yahoo because it would
reduce Yahoo's operating costs for running search and the
company would receive large payments in the form of so-called
traffic acquisition costs (TAC) from Microsoft.
Yahoo would also not have to make hefty research and
development investments for search, Microsoft said.
"On the surface, it looks like a better deal," Gartner
analyst David Mitchell Smith said of Microsoft's search deal
proposal for Yahoo.
Smith cautioned, however, that there may have been issues
not revealed publicly that made the Google deal a better
option.
Microsoft abandoned its offer to buy all of Yahoo in May as
negotiations dragged on, making it unlikely that a deal could
complete regulatory review during the Bush administration, the
source said.
(Additional reporting by Michele Gershberg in New York,
Editing by Gerald E. McCormick, Carol Bishopric, Gary Hill)
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