The Wall Street Journal-20080205-breakingviews-com - Financial Insight- A Note on Winning Friends- To- Steven Ballmer- Microsoft From- Jerry Yang- Yahoo Re- That Unsolicited Bid

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breakingviews.com / Financial Insight: A Note on Winning Friends; To: Steven Ballmer, Microsoft From: Jerry Yang, Yahoo Re: That Unsolicited Bid

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The following is an imaginary reply, as written by Breakingviews' Rob Cox, from Yahoo chief executive Jerry Yang to Microsoft chief Steven Ballmer's letter outlining a $44.6 billion unsolicited offer to buy Yahoo:

Dear Steve:

You really set the fox loose in the henhouse with the letter you sent my board last week! That said, I can't say your $31-a-share offer came as a complete surprise. I will be the first to admit that we have been vulnerable of late.

Since I returned as chief executive last summer, I have been busy crafting and articulating our admittedly complicated strategy. This is an art, not a science -- something Wall Street really just doesn't understand. But hey, with your stock still 45% below its 2000 high, I don't need to be telling you that, Steve.

The real reason I wanted to respond to you in my personal capacity -- the board will craft its own reply -- is to assess the price of friendship. I know that sounds like the touchy-feely stuff from Silicon Valley that you guys in Redmond don't want to hear. But let's face it -- we're in a people business. We're not all that different from those investment bankers at Morgan Stanley and Blackstone who are advising you, except that our staff doesn't need to go up and down elevators to work.

By going after us in an unfriendly fashion, you run the risk that you will scare off the talented engineers and salespeople that David Filo and I have been cultivating since we put Yahoo together 14 years ago out of Stanford University.

I know you think our culture is nothing more than some silly titles on our business cards and purple furniture. But the key to our success is our ability to attract the best and brightest. This has been our biggest challenge in combating that company down the road that shall not be mentioned by name.

Do you think that barging in here with a wad of cash -- and not all that big a wad I might add -- will endear you to these folks? All the juicy employment offers you've been dangling to recent graduates of my alma mater and many of our staff have not made your online business a success. It lost $245 million last quarter alone.

People around the valley still feel pretty sore about Microsoft's use of its dominant software business to push rivals around. That's why I got so many offers of help over the weekend -- even from a certain unnameable Internet search giant. As the folks from Goldman Sachs and Lehman Brothers who are clogging up our conference rooms tell me, there are many ways to make life difficult for you.

We can outsource search -- something Citigroup says will get us a 25% pop in our revenues, while slashing costs. Wall Street would love that. We could merge with MySpace and give Rupert Murdoch stock -- and a big vote -- in the company. Some think we could merge with General Electric's NBC Universal, creating a $70 billion media powerhouse. All of these ideas are now up for discussion.

And they present real alternatives to what you are proposing. Sure, they will take time to pursue, present varying degrees of complication, and would need to be sold to investors and analysts. But Steve, you know David and I built this company from scratch. It is our baby. We can't just hand it over. We'd need to secure a safe berth for our people and our assets. In any event, you'd need them, too.

So let's make a deal. To make the integration of Yahoo work, you need our full cooperation. That means you need to make your offer friendly. By my calculations, Yahoo could be worth some $35 a share if we outsource search, spin off our Asian investments and give back cash. That seems like an acceptable price of friendship.

Sincerely,

Jerry Yang, chief Yahoo

-- Rob Cox

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This column is by breakingviews.com, an online financial commentary site.