Microsoft and Yahoo: Not even on the same page

Despite a brief moment of optimism heading into Saturday, Microsoft and Yahoo were really never closer to doing a merger deal than two ships passing in the night.

There was almost no discussion of price, and those talks that were held suggested to Microsoft that Yahoo was never really prepared to sell itself to the software company, according to a source familiar with the negotiations.

A source familiar with Yahoo's negotiating stance disputed the characterization. However, judging by Yahoo's relative intransigence on price and insistence on several other requirements, it's clear the company wasn't eager to strike a deal. The company didn't want to let it itself be sold at what it deemed a "fire sale" price, the source familiar with Yahoo's position said.

Yahoo wasn't eager to rush things. Although Microsoft made its initial unsolicited $31-share offer for Microsoft on February 1, the first substantive meeting didn't take place until April 15--10 days after Microsoft set a three-week deadline for Yahoo to come to the negotiating table. At that meeting, which was initiated by Yahoo and held in Portland, Ore., Yahoo went through its own revised business forecast as well as some non-price-related deal terms.

Asked by Microsoft CEO Steve Ballmer where Yahoo stood on a takeover price, Yahoo executives responded that they didn't really have one. On April 18, there was a follow-up call with five bankers representing the two companies, sources familiar with the negotiations said. Yahoo's bankers indicated during the call that the company was only prepared to do a friendly deal at $40 a share or higher, sources said; Yahoo began its negotiations with that price because that's what Microsoft had offered in a bid to acquire Yahoo in 2006. That was the only discussion on price until this week, one source said.

Yahoo indicated to Microsoft this week that it might be willing to do a deal at a price lower than $40, and Microsoft later told Yahoo that it was willing to increase its offer by a couple dollars a share. On Friday, Microsoft said it was willing to offer $33 a share, which it viewed as a substantial increase from its original offer given that the original cash-and-stock offer had dropped below $30 a share.

The two sides arranged agreed to meet face-to-face at Seattle's Sea-Tac airport to discuss the revised positions. Microsoft and its bankers headed into the meeting with a fair amount of optimism because that they believed Yahoo shareholders were willing to do a deal at close to Microsoft's improved offer of $33 a share. However, at the meeting, Yahoo co-founders Jerry Yang and David Filo said their board was willing to do a deal around $37 a share, but that they would rather see a deal at around $38 a share.

The disagreements were not confined to price, sources said. Shortly after the April 15 Portland meeting, Yahoo gave Microsoft a list of nonfinancial deal terms.

"They were complete non-starters," one source said.

Yahoo wanted Microsoft to go through an antitrust review that Microsoft believed would have take several months to complete, sources said. One particular area of concern to Yahoo was the combined strength in e-mail that would Microsoft would have by combining Yahoo Mail and Microsoft's Hotmail, and the complications and risks of splitting off parts of the combined business, one source said.

Other conditions that rankled included a breakup fee--essentially, money Microsoft would have to commit to pay to compensate Yahoo in case the deal fell through down the road because of some issue such as regulatory review. And Microsoft was strongly displeased with a provision, added to Yahoo bylaws after Microsoft announced its acquisition proposal, that would require severance payments to all Yahoo employees in the event of acquisition-related layoffs.

"Jerry didn't want to sell the company," one source familiar with the negotiations said.

The source declined to go into specifics regarding Yahoo's demand for review, but said the two sides were as far apart on nonfinancial issues as they were on financial ones.

CNET News.com's Stephen Shankland contributed to this report.