Yahoo was discussing a Microsoft merger as early as February 2007, Microsoft CEO Steve Ballmer confirmed, but Yahoo board members held out faith in the company's turnaround.
Microsoft has offered to pony up $44.6 billion to buy Yahoo, an offer the Internet and search company said was unsolicited, but which it did not reject.
Microsoft's bid on Jan. 31, of $31 a share, which was offered to shareholders in the form of cash or stock, was a 62 percent premium on Yahoo's share price at the close of market Jan. 31, and underscores Microsoft's determination to gain scale in the Internet advertising and development space and to more effectively compete with dominant rival Google.
In a presentation to analysts and the media on Feb. 1, Microsoft CEO Steve Ballmer noted that the online ad market is expected to grow to $78 billion in 2010, adding that a combined Microsoft-Yahoo would be better able to take advantage of that.
In a letter Ballmer sent to the Yahoo board on Jan. 31, he noted that "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."
Although he did not directly refer to Google, Ballmer noted in the letter that "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."
In his letter to the Yahoo board, Ballmer also made clear that Redmond has long been interested in Yahoo, acknowledging that he had in fact received a letter in February 2007 which said that the Yahoo board felt that was "not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction."
The main reason for that view was the Yahoo board's confidence in the "potential upside" if management successfully executed on a reformulated strategy based on certain operational initiatives and a significant organizational realignment. "A year has gone by, and the competitive situation has not improved," Ballmer said.