SEATTLE/SAN FRANCISCO (Reuters) - When Yahoo Inc turned down the latest offer from Microsoft Corp this week, it walked away from $9 billion in cash and $1 billion a year in revenue sharing, a source said on Friday.
Microsoft had offered $8 billion for a 16 percent stake in Yahoo and $1 billion for control of the Web company’s search business, said the source, who is familiar with Microsoft’s thinking.
The proposal also included revenue-sharing that would have delivered $1 billion a year in additional operating income to Yahoo, the person added.
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, the source said. Yahoo had no immediate comment.
Microsoft spokesman Jeff O’Mara declined to comment.
Microsoft’s proposal called for it to take control of Yahoo’s search business, guaranteeing the company better rates for advertisements tied to its search results than Yahoo’s current Panama advertising system, the source said.
As part of its proposed offering, Microsoft also would have paid $8 billion to take a 16 percent stake in Yahoo, which would have valued the company’s stock at $35 a share, the source said.
The offer involved a $1 billion up-front cash payment from Microsoft for Yahoo’s search advertising platform.
Microsoft’s 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, the source said.
Yahoo agreed to let Google sell ads next to its search results in a deal, which according to Yahoo, would boost cash flow by $250 million to $450 million in the first 12 months.
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.
If the full acquisition could not get approval by year-end, the review process could have carried on until as late as Oct. 2009, meaning that Microsoft would have to carry the capital risk of a $40-billion-plus acquisition for 18 months.
It also became less interested in a full acquisition after Yahoo’s search share continued to deteriorate more than Microsoft had forecast, the source said. A lucrative severance agreement put in place by Yahoo’s management also made a full acquisition less appealing, the source said.
Microsoft structured its alternate proposal to focus solely on search to take into account Yahoo’s concerns that combining the two companies’ e-mail, instant messaging users would not gain regulatory approval, the source said.
Shares of Microsoft closed up 83 cents, or 2.94 percent at $29.07 on the Nasdaq, while Yahoo closed down 5 cents, or 0.21 percent, at $23.47.
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