It is unfortunate that Yahoo! has not embraced our full and fair proposal
to combine our companies. Based on conversations with stakeholders of both
companies, we are confident that moving forward promptly to consummate a
transaction is in the best interests of all parties.

We are offering shareholders superior value and the opportunity to
participate in the upside of the combined company. The combination also
offers an increasingly exciting set of solutions for consumers, publishers
and advertisers while becoming better positioned to compete in the online
services market.

A Microsoft-Yahoo! combination will create a more effective company that
would provide greater value and service to our customers. Furthermore, the
combination will create a more competitive marketplace by establishing a
compelling number two competitor for Internet search and online
advertising.

The Yahoo! response does not change our belief in the strategic and
financial merits of our proposal. As we have said previously, Microsoft
reserves the right to pursue all necessary steps to ensure that Yahoo!'s
shareholders are provided with the opportunity to realize the value
inherent in our proposal.

Yahoo may not like Microsoft’s acquisition bid, but Microsoft isn’t backing down.

The Redmond software company isn’t signaling whether it will raise its $44 billion offer or push ahead without Yahoo’s blessing. In a statement Microsoft issued at the end of the day on February 11, company officials said:

“The Yahoo! response does not change our belief in the strategic and financial merits of our proposal. As we have said previously, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.”

"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," Ballmer wrote to Yang.

SAN FRANCISCO -(Dow Jones)- Embattled Yahoo Inc. (YHOO) Chief Executive Jerry Yang has agreed to give up his position, leaving the struggling Internet giant without a clear leader and increasing the possibility an acquirer might seek to buy it.

Yahoo, which earlier this year was the target of a $47.5 billion unsolicited takeover attempt by Microsoft Corp. (MSFT), said Monday it had hired a search firm to look for a successor to Yang, who co-founded the 13-year-old company while he was a graduate student at Stanford University.

Yahoo said it would consider internal and external candidates for the job. Yahoo President Sue Decker is one of the candidates under consideration, a person familiar with the situation said. It wasn't clear why the company hadn't immediately appointed her as chief executive or why Yang's resignation was announced without a successor already chosen.

The new CEO will face a series of difficult challenges, including trying to turn around Yahoo's slumping online advertising business. The new CEO might also be thrust into the difficult position of trying to strike a deal with potential acquirers from a very obvious position of weakness.

"This is a company that could use additional executive experience, but you still have the same strategic issues," said Colin Gillis, managing partner at Click Capital Research.

Reaction to the news, first reported by The Wall Street Journal, was quick. Yahoo shares, which had fallen 1.8% to $10.63 during the regular session, jumped to $11.10 in after-hours trading. Three months ago, Yahoo shares were trading at twice that level.

Yang has been under intense shareholder pressure ever since he rejected Microsoft's offer earlier this year. Calls for his resignation have only increased as Yahoo's business has deteriorated with the slumping economy.

The company, once the leader in Internet advertising, has been losing share in the market for Internet search to Google Inc. (GOOG) and it has been unable to make as much money per search as its larger rival. Yahoo has also been hard hit by the weakening economy because it is more heavily exposed to the slumping online display advertising market.

Yang's dwindling options were recently reduced even further when Google pulled out of a search advertising pact that would have generated hundreds of millions of dollars in additional revenue for Yahoo.

The collapse of that deal prompted Yang to publicly declare he was open to clinching a deal with Microsoft. At one point, Microsoft offered $33 a share to buy the company.

"To this day, I'd say the best thing for Microsoft to do is buy Yahoo," Yang said at a conference earlier this month. "We're willing to sell the company."

Microsoft Chief Executive Steve Ballmer, however, said at one point Yang was an impediment to striking a deal with Yahoo. The company has maintained it was no longer interested in buying Yahoo. Analysts, however, say if Microsoft is serious about mounting a credible challenge to Google, it had no clear choice other than to revisit an acquisition of the company. Microsoft declined to comment.

In addition to battling outsiders, Yang has also had to contend with restive shareholders. Activist investor Carl Icahn, who is Yahoo's biggest shareholder and earlier this year forced himself onto Yahoo's board, has continually pressured Yang to consider selling the company. Icahn, who earlier pushed for Yang to sell the company to Microsoft, recently said the company ought to strike a search deal with the software giant.

Icahn didn't return a call seeking comment.

Yang, who took over as CEO in June 2007, has been plagued with challenges. Initially tasked with trying to revive Yahoo's slumping online advertising business, he introduced a series of strategic and technical initiatives late last year. But Wall Street remained unconvinced, setting the stage for Microsoft's takeover bid earlier this year.

In a press release, Yahoo Chairman Roy Bostock suggested Yang's decision was amicable and came after long discussion inside the company.

"Jerry and the Board have had an ongoing dialogue about succession timing, and we all agree that now is the right time to make the transition to a new CEO who can take the company to the next level," Bostock said in a statement.

Yang, who will remain CEO until a successor is named, will return to a less formal but still-visible role within the company and remain on its board, Bostock's statement said.

Yang, who immigrated to the U.S. from Taiwan as child, created Yahoo in 1994 with fellow Stanford University graduate student David Filo. The two envisioned the site as a directory of material available in the growing online world, a concept that still underscores the feel and operation of the Web site.

The concept quickly grew popular and by 1995, well before the birth of the commercial Internet, Yahoo was regularly getting 200,000 visitors a day. In 1995, Yang and Filo, who had dubbed themselves Chief Yahoos rather than take on more corporate titles, got early support from venture capitalist Michael Moritz at Sequioa.

A year later, Yahoo was employing 39 full-time staffers, including 19 people, known as "surfers," who categorized Web sites vying for a coveted place on the company's list. In 1996, Yahoo sold its shares to the public in an initial offering underwritten by Goldman Sachs & Co. The deal made Yang and Filo instant millionaires, as well as symbols of the Internet bubble that was beginning to inflate in Silicon Valley.

For a while, Yahoo was the undisputed king of the Internet, charging ever- higher prices for advertising. But the company began running into problems, finding it harder to develop new revenue streams. It also faced new challengers, most notably Google, a search engine that used a mathematical approach to finding information on the Web.

Yesterday, BoomTown reported, based on sources, that Yahoo search exec Sean Suchter was headed to Microsoft.

Now it’s official. Here’s a Microsoft (MSFT) statement on the hiring of Suchter (pictured here), an important tech leader at Yahoo (YHOO), from Satya Nadella, SVP for Search, Portal and Advertising:

“We are very pleased to confirm that Sean Suchter will be joining Microsoft as the GM of our Silicon Valley Search Technology Center, working on Live Search. Sean will report into Harry Shum when he starts work on December 22. We look forward to welcoming him to Microsoft at that time.”

The talent grab from Yahoo is an interesting one, given that Microsoft has also tried to to buy Yahoo’s search and search ad business many times, to little success.

Microsoft CEO Steve Ballmer reiterated that desire yesterday at the software giant’s annual meeting, although he discounted the possibility that Microsoft would rebid for all of Yahoo after it abandoned a takeover attempt earlier this year.

His statement sent Yahoo’s stock further into the basement.

Losing important execs like Suchter, who was the VP of Search Technology at Yahoo, will also not help the company’s prospects. Suchter was deeply involved in Yahoo’s efforts to open up its search platform, initiatives the company has touted aggressively as a bright spot in its not-so-lustrous landscape.

Suchter–who came to Yahoo almost six years ago after it acquired Inktomi (the company that got Yahoo into the search business) in early 2003–has been talking with Microsoft for a while and his leaving was not linked to this week’s announcement that Yahoo CEO Jerry Yang will be stepping down.

But it could be linked to the possibility that another former major Yahoo search exec could also be going to Microsoft. I wrote a post earlier today that I thought the Ballmer was looking at Qi Lu–the well-regarded Search and Advertising Technology group EVP at Yahoo, who left earlier this year–to be its digital head.

All this muscling up in search by Microsoft is troubling for Yahoo. There are big questions, now that Yang is stepping down, whether Yahoo will stay in the search business or sell it off. Yang has been a big proponent of doubling down in search, considering it integral to the entire Yahoo ecosystem.

But others make the very persuasive argument that Yahoo will be increasingly outspent by both Google (GOOG) and Microsoft, in what is turning into a very vicious and expensive arms race.

If it sold off its No. 2 search business to Microsoft–ironically, Yahoo used to deliver Microsoft’s search results–many think it could have huge costs savings and garner guaranteed revenues.

News of Suchter’s departure from Yahoo, including the internal memo announcing it, appeared in Valleywag yesterday.

SOFTWARE giant Microsoft is in talks to acquire Yahoo’s online search business for $20 billion (£13 billion).

The proposal forms the centrepiece of a complex transaction that would see Microsoft support a new management team to take control of Yahoo. But there is no intention of Microsoft tabling another takeover bid for the web giant, after its aborted $47.5 billion offer this summer.

It is thought that Jonathan Miller, ex-chairman and chief executive of AOL, and Ross Levinsohn, a former president of Fox Interactive Media, have been lined up to lead the new management team. Senior directors at Microsoft and Yahoo are understood to have agreed the broad terms of a deal, but there is no guarantee that it will succeed.

However Yahoo is under intense pressure from its investors after rejecting the offer from Microsoft. This valued each share at $33. Since then Yahoo’s price has tumbled to a low of $9 per share.

In recent weeks it has risen to $11.5 per share partly due to the arrival of billionaire investor Carl Icahn who won a proxy fight to get a seat on the board.

According to a filing with the Securities and Exchange Commission, Icahn has built up a 5.5% stake in the company which is now capitalised at $16 billion.

Analysts say it is an opportune time for Microsoft and Yahoo to work on a new deal. There is a management vacuum at Yahoo after Jerry Yang, the group’s co-founder, said this month that he will step down as chief executive as soon as the board finds a successor. He opposed the earlier Microsoft deal and an advertising alliance with Google that he championed broke down because of competition fears.

Under the terms of the proposed transaction, Microsoft would provide a $5 billion facility to the Miller and Levinsohn management team. The duo would raise an additional $5 billion from external investors.

This cash would be used to buy convertible preference shares and warrants which would give it a holding in excess of 30% of Yahoo.

The external investors would also have the right to appoint three of Yahoo’s 11 board directors. The talks with Yahoo involve Microsoft obtaining a 10-year operating agreement to manage the search business. It would also receive a two-year call option to buy the search business for $20 billion. That would leave Yahoo to run its own e-mail, messaging, and content services.

It is expected that the operating agreement would boost Yahoo’s income by as much as $2 billion per annum.

While Microsoft and Yahoo remain profitable, they are slipping behind Google on the web. Over half the $40 billion-plus online-advertising market comes from internet-search ads, and analysts estimate Google has about 77% of spending compared with Yahoo’s 18% and Microsoft’s 5%.

The company’s Windows software is the world’s dominant operating system. But in the internet age Microsoft has been losing its edge and arch-rival Google has come to dominate the web.

Microsoft wants to address that. Last May, Microsoft’s former head of online, Kevin Johnson, told his employees: “The fact is we are not where we want to be in this business yet, and we’ve been in this position longer than we’d like.”

Steve Ballmer, Microsoft’s chief executive, has now made two unsuccessful attempts to buy Yahoo.

He has said he is no longer interested in buying the whole company, but has expressed a strong interest in buying the search business.