The letter that Microsoft sent to Yahoo!'s Board of Directors

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.