Microsoft Offers $44.6 Billion To Acquire Yahoo at $31 Share

 Steve Balmer's letter to Jerry Yang

January 31, 2008

Board of Directors

Yahoo! Inc.

701 First Avenue

Sunnyvale, CA 94089

Attention: Roy Bostock, Chairman

Attention: Jerry Yang, Chief Executive Officer

Dear Members of the Board:

I am writing on behalf of the Board of Directors of Microsoft to
make a proposal for a business combination of Microsoft and Yahoo!.
Under our proposal, Microsoft would acquire all of the outstanding
shares of Yahoo! common stock for per share consideration of $31 based
on Microsoft’s closing share price on January 31, 2008, payable in the
form of $31 in cash or 0.9509 of a share of Microsoft common stock.
Microsoft would provide each Yahoo! shareholder with the ability to
choose whether to receive the consideration in cash or Microsoft common
stock, subject to pro-ration so that in the aggregate one-half of the
Yahoo! common shares will be exchanged for shares of Microsoft common
stock and one-half of the Yahoo! common shares will be converted into
the right to receive cash. Our proposal is not subject to any financing
condition.

Our proposal represents a 62% premium above the closing price of
Yahoo! common stock of $19.18 on January 31, 2008. The implied premium
for the operating assets of the company clearly is considerably greater
when adjusted for the minority, non-controlled assets and cash. By
whatever financial measure you use - EBITDA, free cash flow, operating
cash flow, net income, or analyst target prices - this proposal
represents a compelling value realization event for your shareholders.

We believe that Microsoft common stock represents a very attractive
investment opportunity for Yahoo!’s shareholders. Microsoft has
generated revenue growth of 15%, earnings growth of 26%, and a return
on equity of 35% on average for the last three years. Microsoft’s share
price has generated shareholder returns of 8% during the last one year
period and 28% during the last three year period, significantly
outperforming the S&P 500. It is our view that Microsoft has
significant potential upside given the continued solid growth in our
core businesses, the recent launch of Windows Vista, and other
strategic initiatives.

Microsoft’s consistent belief has been that the combination of
Microsoft and Yahoo! clearly represents the best way to deliver maximum
value to our respective shareholders, as well as create a more
efficient and competitive company that would provide greater value and
service to our customers. In late 2006 and early 2007, we jointly
explored a broad range of ways in which our two companies might work
together. These discussions were based on a vision that the online
businesses of Microsoft and Yahoo! should be aligned in some way to
create a more effective competitor in the online marketplace. We
discussed a number of alternatives ranging from commercial partnerships
to a merger proposal, which you rejected. While a commercial
partnership may have made sense at one time, Microsoft believes that
the only alternative now is the combination of Microsoft and Yahoo!
that we are proposing.

In February 2007, I received a letter from your Chairman indicating
the view of the Yahoo! Board that “now is not the right time from the
perspective of our shareholders to enter into discussions regarding an
acquisition transaction.” According to that letter, the principal
reason for this view was the Yahoo! Board’s confidence in the
“potential upside” if management successfully executed on a
reformulated strategy based on certain operational initiatives, such as
Project Panama, and a significant organizational realignment. A year
has gone by, and the competitive situation has not improved.

While online advertising growth continues, there are significant
benefits of scale in advertising platform economics, in capital costs
for search index build-out, and in research and development, making
this a time of industry consolidation and convergence. Today, the
market is increasingly dominated by one player who is consolidating its
dominance through acquisition. Together, Microsoft and Yahoo! can offer
a credible alternative for consumers, advertisers, and publishers.
Synergies of this combination fall into four areas:

— Scale economics: This combination enables synergies related to
scale economics of the advertising platform where today there is only
one competitor at scale. This includes synergies across both search and
non-search related advertising that will strengthen the value
proposition to both advertisers and publishers. Additionally, the
combination allows us to consolidate capital spending.

– Expanded R&D capacity: The combined talent of our engineering
resources can be focused on R&D priorities such as a single search
index and single advertising platform. Together we can unleash new
levels of innovation, delivering enhanced user experiences,
breakthroughs in search, and new advertising platform capabilities.
Many of these breakthroughs are a function of an engineering scale that
today neither of our companies has on its own.

– Operational efficiencies: Eliminating redundant infrastructure and
duplicative operating costs will improve the financial performance of
the combined entity.

— Emerging user experiences: Our combined ability to focus
engineering resources that drive innovation in emerging scenarios such
as video, mobile services, online commerce, social media, and social
platforms is greatly enhanced.

We would value the opportunity to further discuss with you how to
optimize the integration of our respective businesses to create a
leading global technology company with exceptional display and search
advertising capabilities. You should also be aware that we intend to
offer significant retention packages to your engineers, key leaders and
employees across all disciplines.

We have dedicated considerable time and resources to an analysis of
a potential transaction and are confident that the combination will
receive all necessary regulatory approvals. We look forward to
discussing this with you, and both our internal legal team and outside
counsel are available to meet with your counsel at their earliest
convenience.

Our proposal is subject to the negotiation of a definitive merger
agreement and our having the opportunity to conduct certain limited and
confirmatory due diligence. In addition, because a portion of the
aggregate merger consideration would consist of Microsoft common stock,
we would provide Yahoo! the opportunity to conduct appropriate limited
due diligence with respect to Microsoft. We are prepared to deliver a
draft merger agreement to you and begin discussions immediately.

In light of the significance of this proposal to your shareholders
and ours, as well as the potential for selective disclosures, our
intention is to publicly release the text of this letter tomorrow
morning.

Due to the importance of these discussions and the value
represented by our proposal, we expect the Yahoo! Board to engage in a
full review of our proposal. My leadership team and I would be happy to
make ourselves available to meet with you and your Board at your
earliest convenience. Depending on the nature of your response,
Microsoft reserves the right to pursue all necessary steps to ensure
that Yahoo!’s shareholders are provided with the opportunity to realize
the value inherent in our proposal.

We believe this proposal represents a unique opportunity to create
significant value for Yahoo!’s shareholders and employees, and the
combined company will be better positioned to provide an enhanced value
proposition to users and advertisers. We hope that you and your Board
share our enthusiasm, and we look forward to a prompt and favorable
reply.

Sincerely yours,

/s/ Steven A. Ballmer

Steven A. Ballmer

Chief Executive Officer

Microsoft Corporation

  

Steve Balmer's eMail to Microsoft Employees 

From: Steve Ballmer

Sent: Friday, February 01, 2008 3:39 AM

To: Microsoft - All Employees (QBDG)

Subject: Proposed Acquisition of Yahoo!

Today, I am very excited to announce that Microsoft has made a
proposal to acquire Yahoo!. This announcement represents a big
opportunity for Microsoft, and is the next major milestone in our
companywide transformation to embrace online services, search, and
advertising.

By combining the strengths of our companies, we can deliver an
efficient and highly competitive offering for our customers. Our
complementary assets will give us increased talent and scale to compete
in the markets of search and online advertising, and pioneer new
innovations in the areas of video, mobile services, online commerce,
and social media.

This year, online advertising is a $40 billion business. It will
grow to $80 billion by 2010 and will continue to increase in the years
beyond. This market provides a significant growth opportunity for
Microsoft—our ability to provide the best search and online
experiences for consumers, and the best ad platform for publishers and
advertisers, is the key to unlocking this opportunity.

We are on a good path with our existing search and advertising
product roadmaps. To date, we have made progress in our organic online
services and advertising efforts, and by joining with Yahoo!, we will
take the next step toward becoming a major search destination and
social platform for consumers. The combined reach of our content
properties and combined breadth of our tools for advertisers will
enable us to provide an online advertising platform at scale. Together,
we'll create a company that is in a much better position to compete
against an increasingly dominant player in this market.

Through our recent acquisitions of aQuantive and Tellme, we
understand what it takes to successfully integrate new talent, assets,
and infrastructure into our company. Leaders from both Microsoft and
Yahoo! will work together closely on the integration process to ensure
that we are thoughtful about the questions we ask and the decisions we
make. As we move forward, we'll look carefully at how to bring our
assets together to create the greatest value for customers, employees,
and shareholders.

During this transition period, I urge you to stay focused on your
commitments and team goals. We are committed to communicating with you
frequently as our leadership team works on bringing the two companies
together.

As I outlined in my quarterly strategy email last week, we grow by
anticipating new areas where software has the greatest potential to
create opportunities. The proposed acquisition of Yahoo! will transform
our ability to compete as new opportunities in online services, search,
and advertising emerge.

I am very excited about today's announcement and about the
collective talent and energy we will bring to the industry. A great
opportunity is in front of us to evolve how people and businesses
create, find, and use information. Through today's proposed
acquisition, we can take our business to new levels of success and
growth.

Kevin Johnson, Chris Liddell, Ray Ozzie and I will host an employee
web cast that can be viewed live beginning at 10:00am PST and will also
be available on-demand. You can link to the web cast at
http://msw/NewsEvents/StudioCasts/Pages/conferences.aspx [ed. note:
this is an internal Microsoft link].

Steve

•  Microsoft's Press Release and Letter to Yahoo Directors Feb 1st

• Microsoft's Counsel Response to Google's Counsel Blog Post

REDMOND, Wash., Feb. 1, 2008 - Microsoft Will Host a Conference Call Today to Discuss its Proposal to Acquire Yahoo! Inc. with:

When:

Friday, February 1, 2008

8:30 AM Eastern / 5:30 AM Pacific

Press Conference Call

To participate in the teleconference please call: (866) 610-1072 and reference the conference ID number: 33470390

For individuals outside of the US, please call: (706) 634-9230

Live Webcast

Due to the expected number of callers, please call at least 20 minutes before the conference is to begin.

Playback
of the conference call and the audio webcast will be available for
replay through the close of business on February 5, 2008. The replay
can be accessed by dialing (800) 642-1687 or (706) 645-9291; the
conference ID number is 33470390.

This acquisition offer comes on the heels of the planned 1,000 layoffs of Yahoo employees and the departing of Yahoo's CEO Terry Semel .  A similar discussion was also rumored to have taken place a year ago, but did not go forward.

Yahoo's official response was that it's directors
"will evaluate this proposal carefully and promptly in the context of
Yahoo's strategic plans and pursue the best course of action to
maximize long-term value for shareholders." 

In Jerry Yang's letter to employees on Feb 6th, he wrote:

Subject: Building on our strengths

yahoos –

first off, I want to thank you for the great job you're doing staying focused
on executing our priorities. there's obviously been a lot of talk about yahoo!
in recent days and we won't let it distract us from pursuing our transformation
strategy.

roy and I have communicated about the thorough review process our board is
going through right now. the board is focused on maximizing the value of
yahoo!'s tremendous assets for our shareholders. and it is going to take the
time it needs to do it right.

as we've said, no decisions have been made about microsoft's proposal. our
board is thoughtfully evaluating a wide range of potential strategic
alternatives in what is a complex and evolving landscape. and we've hired top
advisors to assist through the process.

what's become clear in the past few days is how much people care about this
company. we've seen a strong show of support from our users, advertisers, and
publishers, reminding us how much they love our products and services. and i've
heard from many of you — and from other friends and colleagues from around
silicon valley and across the globe — that we need to do what's best for yahoo!
and our shareholders. i promise you that the board is going to do that.

the microsoft interest highlights the tremendous strength of the yahoo! brand
and assets: our half billion users around the world, our leading products and
services, our open ad network, our technology, and most of all, our amazingly
talented people.

we have a lot to be excited about and there's more good news to come.
yesterday we announced a digital music partnership with rhapsody and our
acquisition of foxytunes, maker of the popular music toolbar plugin. today we
launched zimbra 5.0, a next generation e-mail and collaboration suite that's a
great milestone in our open platform and starting point strategies. and stay
tuned for exciting announcements next week at the mobile world congress.

as we look to build on the progress we've been making, i want to make sure
you all realize how essential you are to yahoo!'s success. as this process moves
forward, we're going to keep you informed. your hard work and strong commitment
are more important now than ever before.

jerry

This could develop into a hostile takeover  if  Yahoo's directors resist.

At the end of the trading day, Yahoo (YHOO, Fortune 500) shares  increased by  48%,  Microsoft (MSFT, Fortune 500) shares declined by 6.6%.

Google's Lead Consel Gives Google's Official Reaction

http://googleblog.blogspot.com/2008/02/yahoo-and-future-of-internet.html

Google & Yahoo in merger Talks on Microsoft Hostile Takeover http://www.reuters.com/article/mergersNews/idUSN0351550120080204 

A story this controversial is being carried by various top blogs
with hot comments,  Here are the links to the most popular ones
discussing this breaking story. 

Yahoo's official Blog

http://ycorpblog.com/2008/02/01/our-response-to-microsoft%e2%80%99s-proposal 

• http://www.techcrunch.com/2008/02/01/wow-microsoft-offers-446-billion-to-acquire-yahoo/ 
• http://www.engadget.com/2008/02/01/microsoft-offers-44-6-billion-for-yahoo/
  
• http://mashable.com/2008/02/01/microsoft-wants-to-acquire-yahoo-for-446-billion/
  
• http://searchengineland.com/080201-064343.php

UPDATE:  Yahoo Rejects Microsoft's $31 Share Bid As Too Low

http://online.wsj.com/article/SB120257515426256541.html 

After a series of meetings over the past week, Yahoo's board determined
that the $31 per share offer "massively undervalues" Yahoo, the person
said. It also doesn't account for the risks Yahoo would be taking by
entering into an agreement that might be overturned by regulators. The
board plans to send a letter to Microsoft Monday, spelling out its
position.

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