If Yahoo just gave up on search, it would be at Google's mercy, like so many other Web publishers. What Google gives, it can take away. And Yang surely knows this, since it's exactly the game he used to play with other websites.

When MarketWatch, the finance-news site, was preparing to go public — this was long before its sale to Dow Jones, of course — Yahoo Finance was linking to its stories for free. As founder Larry Kramer told the tale to me, he thought this was great — free traffic, right? His investment bankers disagreed, seeing this as a big risk, since Yahoo could stop linking at any time. Eventually, MarketWatch struck a commercial deal to pay Yahoo in exchange for a guarantee of continuing traffic.

One of the few Yahoo sites that gets more traffic from Yahoo Search than from Google is Yahoo Maps. When users typed an address into Google, in the early days, Google would link directly to a Yahoo Maps page for the location. And then Google created its own maps site. Links to Yahoo Maps grew less prominent, than disappeared altogether.

The same could happen to any of Yahoo's Google-dependent properties. Yahoo Search is, at the least, a hedge against such a move. Or it would be, if its share of the search market weren't ever dwindling.

The reality: If Microsoft bought Yahoo's search, nothing would really change for Yahoo's valuable, profitable media properties. Traffic from Yahoo Search would continue to decrease — perhaps more sharply, with Microsoft's incompetent Web executives in charge — while traffic from Google would continue to increase. That's where Jerry Yang and Microsoft CEO Steve Ballmer find common ground, in a shared delusion — that either of their search engines, alone or together, amount to anything.

When you look back at this fiasco, the critical error on Yahoo's part was doing nothing for 5 weeks after the initial offer. They thought they could play hard to get. We've gotten a round-trip back to $19.

Yahoo wants to play it now like Microsoft was the one that rejected the deal, but even when Yahoo execs finally did meet with Microsoft on March 10, they refused to discuss how much they actually would sell the company for. Yahoo used antitrust concerns — the one's they've ignored doing a deal with Google — as excuse for why they couldn't talk price. Even an April 15 meeting at Bill Gates's father's law firm in Portland went without Yang saying how much it would take. Microsoft's top lawyer Brad Smith called it "one of the strangest meetings that we've ever had." Finally, on May 2, Yahoo's board came up with a number: $37 per share. But by then, four months after Microsoft made its offer public, Ballmer had already decided he didn't want the deal. In fact, reports the Wall Street Journal, Ballmer made his decision in the middle of March — after about 5 weeks of Yahoo silence.

• Former Fox Interactive boss Ross Levinsohn and AOL CEO Jon Miller, now partners at Velocity Interactive, seem to come as a pair. Levinsohn is best known for acquiring MySpace for Fox Interactive and quitting the company after it wouldn't buy Digg. But Levinsohn is also known for bullying entrepreneurs — once, so badly that renowned angel investor Ron Conway reportedly "flew off the handle" at him. In some quarters and in Jason Calacanis's heart, Miller gets credit turning around AOL. But like any exec, Miller has his detractors at AOL and they came out of the woodwork when he was fired last year. One described him as
  

  An executive over 4 years that put more incompetent people in high-places (e.g., McKinley) while firing (Govern) and letting reams of talented folks (e.g., Kotay, list-o-long) leave that were passionate and—at least—somewhat competent, and were actually trying to foster some core innovation and synergy.

• OpenTable’s CEO Jeff Jordan is on Yahoo shareholders and board members' wishlist, just like he was on Facebook founder Mark Zuckerberg's list to become COO of that company before it settled on Sheryl Sandberg. An eBay veteran, Jordan was thought to be in line for Meg Whitman's job until he took over as OpenTable's CEO in 2007. His reputation as a "product Nazi" led Valleywag to endorse him for Yahoo's top job way back in November 2006.
• Tim Armstrong heads up Google's ad sales force and the unit is perhaps respectably profitable enough for Yahoo shareholders and board members to include him on their list. We wonder, however, if the board knows about Armstrong's involvement with sketchy search engine spam company Associated Content.
• Why wouldn't Yahoo's board and shareholders want Microsoft’s Kevin Johnson for the company's top job? Ever since Microsoft CEO Steve Ballmer announced a bid to acquire the company on February 1, no one's given more thought to running Yahoo. Johnson's even written several memos on the topic — showing great ability to include exclamation marks after the company's name while still respecting the need for capital letters.

It's a claim that could end Yahoo CEO Jerry Yang's time at the company. While in Yahoo's presentation there are other, truer claims — for example, that Carl Icahn typically wrecks havoc on most public companies under his influence — claiming Microsoft never really wanted to buy the company is outright lie. And its one so bold that it subverts Yang's efforts and screams the truth: that until it was too late to fix them, Yang and the board know all they did was blow Microsoft negotiations. Yahoo's presentation is embedded below.

The most important application for the foreseeable future is search. It’s where you start things. It’s where you express intent. It is important. I don’t think we can say, okay, well, we’re going to be in the ad platform business, and we’re going to do it just on the strength of non-search based assets. We have to be in the ad business, and we’ve got to have a good chunk of the search market

We disagree. Google owns Web search and search advertising and its not giving it back. Rather than chase Google in a race it can't win, Microsoft should acquire Facebook and see if it can make something real out of what Zuckerberg and company tried to do with Beacon ads.

Dear Jerry, Congratulations. You got Microsoft to walk. You’re thrilled. Shareholders aren’t. You’ve become a pawn of the dominant company on the Internet. You think of Yahoo as your baby. It’s not your baby. Not since Yahoo went public. I can hear you protesting that Microsoft walked, not you. But how many times did Microsoft come knocking. Forced to negotiate, you rarely brought any of your investment bankers. You brought Filo. By May, Ballmer raised his offer. You claimed to be holding out for more, asking the only person interested in buying your company to bid against himself. You were creating incentives for a employee walkout after a change of control. Where does this leave you? Your days as Yahoo’s CEO are numbered.

It's sobering to realize that during Ballmer's term as CEO, MSFT has underperformed almost all of its top tech peers (including AAPL, IBM, HPQ, SAP, INTC, CSCO, SYMC, NOK, ORCL, ADBE, RIMM, QCOM, Ebay, and AMZN), and badly lagged the major averages. We may even see our third plunge to test the 2000 lows during his watch. Unbelievable.

Maybe people will tire of bashing Jerry Yang for a moment to look at Ballmer's role in Microsoft's epic Yahoo acquisition failure.(Photo by AFP/Getty Images)

VeriSign chairman Jim Bidzos
An employee's advice to senior management:

Don't drag out the divestiture process in an effort to get a few extra bucks. And if you're going to kill the whole thing, be honest with employees about opportunities.

AMD chairman and CEO Hector Ruiz
An employee's advice to senior management:

AMD needs to go back to basics. What business is AMD in, who do you need onboard to lead the company in that business, who do you need that can create demand for the product, and what do the customers want? Ignore the "how" and focus on the "who." Stop treating employees like costs and more like assets. Threatening cubical hoteling and pushing the "do more with less" story is oppressive, not inspiring. The most marketable talent will leave first.

EMC CEO and chairman Joe Tucci
An employee's advice to senior management:

Senior management needs to respect its employees, listen to feedback and not bury its head in the sand as it relates to issues of sexism and lack of diversity. The culture continues to be predominantly young white men and this is largely because people hire who they know. "Breaking the glass ceiling" requires a lot of sacrifice! They will cite a few examples of high profile women, but these are the exception, not the rule. Work/life balance is not a priority in this company. Most of the highest ranking professional women in this organization are unmarried or do not have children. They need to recognize the need for more flexible work options that promote the importance of family. And most importantly, there need to be consequences for illegal and unethical behavior, regardless of who commits it! People cannot be protected from this. There are too many blind eyes turned when sexual harassment, illegal business practices, or other unethical acts occur.

Yahoo CEO Jerry Yang

An employee's advice to senior management:

Be more open to the workforce opinions. Be more humble. Be less political. Listen more, do more, and quickly.

eBay CEO John Donahoe
An employee's advice to senior management:

Streamline the process so people can focus more on getting their work done. Share more of the details of the vision for eBay and the competition of eBay.

Symantec CEO John Thompson
An employee's advice to senior management:

Open your eyes to how the actually successful companies are doing it. Use your talent pool and clear the way to innovate internally. Shift the focus from salesmanship to inherent quality. Build products that sell themselves rather than needing an aggresive sales cycle to move.

Hewlett-Packard chairman, president and CEO Mark Hurd
An employee's advice to senior management:

Stop screwing the employees. Stop reducing benefits every week. Stop saying you plan to invest in research and development when you are actually reducing everything except your bonuses. Start treating people as people. Get some moral fiber.

EDS chairman, president and CEO Ron Rittenmeyer
An employee's advice to senior management:

As I said above, either learn to trust the junior leadership you put into place or replace them. Set goals and then GET OUT OF THE WAY and allow the leadership the flexibility to execute to them. If they don't perform, release them. The micromanagement culture has to stop.

IBM chairman, president and CEO Sam Palmisano
An employee's advice to senior management:

One thing is missing though, an acceptance of the fact that there are "superstars" in the world, and that these superstars perform several orders of magnitude better than regular employees. What is missing within IBM is the ability to seek out, and nourish these superstars. Over time superstars will leave IBM because they will get much more recognition in other organizations. This has an impact on IBM's ability to deliver some things.

Microsoft CEO Steve Ballmer
An employee's advice to senior management:

There is a severe lack of leadership in the company. With so many things going on it takes executives too long to commit to business decisions and too long to pick up on competitive responses to disruptive technologies.Microsoft promotes based on 2 facets - technical knowledge and political saavy. What Microsoft does not promote based on is leadership ability, managerial ability or business saavy.

(Photo of Ballmer by AP/Sarbach)

Things became so bitter that, on one occasion, Mr. Gates stormed out of a meeting in a huff after a shouting match in which Mr. Ballmer jumped to the defense of several colleagues, according to an individual present at the time. After the exchange, Mr. Ballmer seemed "remorseful," the person said.

After which, we imagine, in a private exchange on the quiet walking trails which meander through the bucolic woods which surround the Microsoft campus, Gates tearfully exclaimed to Ballmer, "I wish I knew how to quit you."

Short-term analysis of the revenue potential of outsourcing monetization may not take into account the longer term impact on the competitive market if search becomes an effective monopoly.

Translation: Yahoo can't outsource its search to Google, because that would give Google a monopoly over search. It's as though Microsoft CEO Steve Ballmer wrote the words himself — which he did, four months later.

Having turned down Microsoft at $40 a share, why would Yahoo then accept a bid at a price 23 percent lower than that? One has to weigh cofounders Jerry Yang and David Filo's resistance to Microsoft's overtures in light of that earlier offer; they can argue that they were trying to get Microsoft to better its earlier price, rather than rejecting its new, lowball offer.

Still, Yang and Filo don't come off well in the complaint. Yang is shown pushing for a $1.5 billion severance plan that even Yahoo's compensation consultant called "nuts"; Filo is an oddball figure who, lacking a board seat and a title other than "Chief Yahoo," never should have been involved in the negotiations in the first place. If the board needed an excuse to push Yang and Filo aside, the plaintiffs certainly made the case for them.

But after Yahoo cofounders Jerry Yang and David Filo showed it would take a messy proxy fight to push a merger through at Microsoft's price, Gates lost patience and quashed the whole enterprise, reminding Ballmer that Microsoft really just wanted Yahoo's search business. Now Yang and company — under pressure from activist shareholders — crave a full merger and believe it to be a "a strategic imperative for Microsoft," according to one source who also observes: "I think sometimes that their execs must be smoking something."

Yang's negotiation gaffe so enraged shareholders that Yahoo chairman Roy Bostock has had to promise them that the Yahoo CEO now has Bostock or other board members in attendance at all ongoing negotiations with Microsoft. "They are telling us it is 'adult supervision,'" one investor told BoomTown, "and that Jerry has more of a realistic attitude now too that some kind of transaction has to happen and Yahoo has few options." Says another: "Jerry is beloved at the company and he knows now that that's at risk if let's this spin out of control any more, so I think he's wised up to the situation." (Photo by Yodel Anecdotal)

The fact that they're at the table — regardless of what they were telling themselves got them to the table — it's much more likely that they say "enough with the four foot high stack of paper outlining the details of the deal. Just merge."

The Wall Street Journal reports these executives are "divided" over whether to go through with a deal. BoomTown's Kara Swisher reports "it is more likely than not" that Google will monetize some Yahoo search queries, but only if the deal is transparently "non-exclusive, limited and also low-key" — in other words, not worth close to $1 billion.

Microsoft remains obsessed with Google's dominance in search. Its brightest minds are confounded by its inability to catch up; they saw acquiring Yahoo as a way to instantly bulk up, and apply their algorithms to a larger database of searches.

But that presumes that all we do, all day long, is search the Web. The truth is search is just one of many online activities. When Google got to it, early pioneers like Yahoo had neglected it, leaving much room to exploit and improve Web search.

Yahoo and Microsoft both might do well to take as a given that Google will dominate search for the foreseeable future. Consumer inertia will dictate that, if nothing else; trying to make search ever fancier is a sure way to keep Google as the search engine of choice. Feature-obsessed Microsoft engineers will likely lard up Windows Live Search with more virtual gewgaws; Yahoo would do well to simply ape Google's simplicity.

The mooted plan to have Google serve some of the ads on Yahoo's search results, but only if they make more money for Yahoo is wise, and not just because it may pass antitrust scrutiny. Yahoo should not abandon the business of contextual advertising, as the art of matching ads to search keywords is known.

Yahoo, in theory, should know more about its users than Google; if it is ever able to apply that data to advertisements, it may well be able to make some searches more profitable than Google can. And Google, with its larger corpus of search queries, may squeeze more dollars out of some searches than Yahoo ever can. Cooperating cleverly doesn't mean giving in; it means maximizing one's profits. Suggestions that Yahoo fire the 2,000 or so employees of its search marketing business and throw all of its text-advertising sales to Google seem to go too far; but perhaps Yahoo should abandon all its algorithmic research and concentrate instead on analyzing its users' online behavior.

Downplaying search, too, seems wise. Jerry Yang says he wants to make Yahoo a set of "starting points" for Web users; but of all the possible ones, an empty search box seems like the least interesting place to start. What can Yahoo add to that blank space? Since Yang and Filo first started picking websites for Yahoo's online directory 15 years ago, they've created experiences for users — "programmed" in the media sense, not the software sense. Even user-generated sites like Flickr have relied on community managers to set the tone and show users what's possible. That has always struck me as Yahoo's strength, and they should build on it.

The biggest criticism of Yang is that he hasn't seemed to found Yahoo's purpose on the Web today. If he just stops searching, perhaps he'll find it.

Compete reports visits to AOL are down 21 percent in the last year. It's "people count" dropped from 74 million to 60 million in the same time. Face it: AOL remains popular because old people in middle America are too lazy to change their default home page. If Microsoft really wants a decrepit 1990s Internet brand name cheap, it could probably get Prodigy from AT&T for a lot less than $10 billion.

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 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.

Sincerely yours,

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

Kevin Johnson, president of Microsoft's Platform and Services Division, which includes Windows and MSN, is the most likely candidate. But like Ballmer, he has a sales background, and he, too, was involved in the failed Yahoo bid. Chief operating officer Kevin Turner is despised within the company, and despite previously being Wal-Mart's CIO, he's not seen as having the right kind of technology background. Ray Ozzie, a respected innovator, has yet to introduce any game-changing new products. Robbie Bach heads up the division that houses the Xbox, one of Microsoft's few hits outside Windows and Office — but he seems too disconnected from Microsoft's core businesses. The rest? A muddle of undistinguished Microsoft lifers and recently imported suits.

Of course, if Yang were to announce such a deal, the first thing Ballmer would do is call the Department of Justice to stir up antitrust trouble. So Google and Yahoo plan to make the deal non-exclusive, with Yahoo serving up its search results to the highest bidder — which probably be Google every time.

Combined, Yahoo and Google would make up 80 percent of the search engine market, according to ComScore. Yesterday, Google CEO Eric Schmidt told CNBC a Microsoft-Yahoo merger would give the new company 80 to 90 percent control over the email and instant messaging markets and "eliminate consumer choice."

The future of the way people consume information is going to change in the next 10 years dramatically. We are committed to leading. We are not today leading. We've got very talented bright people. But there are some structural things in the industry that make it hard to make rapid progress. We need to gain scale. Yahoo accelerates scale. Gets us more advertisers, gets us search. Yahoo's not a strategy. It's a part of a strategy. I know exactly what I think Yahoo is worth and I won't go a dime above. We've got three big options: the friendly deal, an unfriendly deal, [or] simply to walk away. If Yahoo doesn't happen there's a number of other things we'll look at.

Was parked on University Ave right east of University Cafe near Waverly, on a conference call dealing with business for my own startup company. And lo and behold, Steve Ballmer, Kevin Johnson and some other woman walked out of the building on the corner (right @ 3pm). They walked along University Ave toward El Camino Real. I worked at MSFT for 3 years before leaving to do my start up so I know it was certainly then. Lots of silence on the Yahoo deal, and perhaps they were on Facebook business unrelated... but who knows.

Jobs. Microsoft has put $1.5 billion on the table to retain Yahoo employees, but what about the kids in Redmond? The combined workforce — around 79,000 at Microsoft and 13,800 at Yahoo — is a lot closer to 100,000 than any investor would like to see. Many of the employees at the two companies are investors through stock and option programs. All the same, they might take a dimmer view of new staff efficiencies than your typical equity holder. (Photo by AP/Virginia Mayo)