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Saturday, May 03, 2008, 07:40 pm PT (10:40 pm ET)

Microsoft steps back from Yahoo bid

A takeover that would have created one of the largest single rivals to Internet giant Google has been abruptly canceled, as Microsoft has formally withdrawn its bid to acquire Yahoo.

Microsoft CEO Steve Ballmer has confirmed the move Saturday evening in a letter that has been delivered to Yahoo chief Jerry Yang as well as published online.

The Microsoft executive has revealed that his company earlier this week raised its bid from $31 per share to $33, but claims that a combination of Yahoo's demand for an even higher bid and deliberate attempts to sour the deal have made any takeover unrealistic. He also contradicts a recent rumor that a hostile takeover was close, instead saying that any attempt to circumvent the Yahoo board with a proxy battle would be destructive.

"It is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders," Ballmer explains. "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."

Some of these steps have included recent gestures towards a permanent deal with Google that would see at least some of Yahoo's search ads outsourced to its Californian neighbor. To Microsoft, the alliance would drive further business to Google, splinter Yahoo's own revenues, and push out many valuable engineers that Microsoft would consider crucial in any takeover.

The truce ends a more than three-month standoff between Microsoft and Yahoo, which began in late January when Microsoft publicly submitted a bid worth $44.6 billion in an attempt to create a larger rival to Google in the online ad and search marketplaces. Yahoo has rejected the offer since the beginning, claiming that Microsoft has underestimated Yahoo's value.

Apple has stood to feel at least a slight impact from the since nullified deal. While most of its web deals are with Google, the electronics maker has installed Yahoo search and weather tools on the iPhone and iPod touch, and allows Apple TV users to browse photo albums from Yahoo-owned Flickr.

Regardless of what may have occurred, Microsoft now plans to pursue its earlier strategy and will develop its ad and search businesses without Yahoo. This includes both its own staff and possible "strategic transactions" with other companies, according to Ballmer. However, the top-ranking Microsoft official says that his company has not changed its opinion of what the acquisition would have meant to its future.

"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," he says. "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."