Evan Schuman's StorefrontBacktalk

Microsoft on Saturday (May 3) gave up its efforts to acquire Yahoo, declaring such an effort too expensive.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer," Microsoft CEO Steve Ballmer said in a letter to Yahoo CEO Jerry Yang. "After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal."

Ballmer added that he still believes such a partnership would make sense. "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. By failing to reach an agreement with us, you and your stockholders have left significant value on the table," he wrote. "But clearly a deal is not to be."

Yahoo’s Yang issued a statement of his own late Saturday, where he pledged to continue as before. "With the distraction of Microsoft’s unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users," Yang said in the statement.

In the letter, which Microsoft released to the media late Saturday, Ballmer disclosed that Microsoft had sweetened its offer for Yahoo this week, but that the world’s largest software vendor was frightened away by Yahoo’s anti-hostile takeover tactics.

"In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31," Ballmer wrote. "Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer."

Ballmer then directly addressed the hostile takeover threat, which Microsoft had publicly hinted at.

"After giving this week’s conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders. 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," Ballmer wrote. "We regard with particular concern your apparent planning to respond to a ‘hostile’ bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo undesirable to us for a number of reasons."

Ballmer said such a Google move would "fundamentally undermine Yahoo’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on your display advertising business to fuel future growth."