Yahoo co-founders Jerry Yang and David Filo flew to Seattle to meet Microsoft Chief Executive Steve Ballmer and his lieutenant Kevin Johnson on Saturday morning, where they indicated Yahoo could do a deal at $37 a share, sources said. That was the last face-to-face meeting of a busy week.
Microsoft's deadline to Yahoo to reach a deal or prepare to face a hostile takeover passed without incident a week ago on Saturday.
But the following Tuesday, Yang and Roy Bostock, the chairman of Yahoo's board, called Ballmer twice, urging the Microsoft CEO not to make good on his threat to go hostile or walk away, a person familiar with Microsoft's thinking said.
The next day, Wednesday Apr 30, Ballmer flew to Palo Alto, Calif., for a meeting with Yang near Yahoo's Sunnyvale headquarters, the sources said.
Yang had long said that Microsoft's cash-and-stock offer, originally worth $31, was not enough. On Wednesday he informally told Ballmer that Yahoo could go for less than $40 a share, a price previously tossed out as a possibility -- but never formally quoted -- in meetings between advisers on both sides, sources said.
Yahoo indicated that "below $40, there could be a lot of debate," one person close to the company said.
But price wasn't the only stumbling block, two people familiar with the negotiations said.
At an Apr 15 meeting in Portland, Oregon, Yahoo had also raised regulatory concerns about a potential merger, and pressed for "value-certainty" -- assurances that the value of Microsoft's offer would remain the same when the deal, if it did get done, closed, one of the two people said.
In recent days, Microsoft had indicated the possibility it could raise its offer by a "couple of dollars," but did not formally make a higher offer to Yahoo, one of the people involved in the discussions said. Neither did it address Yahoo's concerns adequately, the person said.
Despite harsh talk in public letters over the last few months, the two sides were cordial in recent days.
"It didn't end with any acrimony," the source said. "Ballmer knew there was only one way to acquire Yahoo, and that was on a friendly basis."
News that talks had heightened leaked on Friday evening, but both sides were being careful about what they promised.
Yahoo insiders were also debating what price would be acceptable. Yang and Filo personally felt they could not go below $38, but the board Yang led was ready to sell the shop for $1-a-share less.
When the two men flew to Seattle on Saturday morning, they gave the board's price, and their own reservations, two people briefed on the discussions said.
Ballmer finally came out with his raised offer -- $33 a share, compared with the initial offer worth $31 a share and about $29 a share at the end of last week. "Today for the first time Ballmer said $33," the source said on Saturday.
Ballmer and Johnson, Microsoft's Platforms & Services Division President, failed to reach a deal with Yang and Filo.
Filo and Yang flew back to California, expecting a counter-offer to their $37 price.
Instead, Ballmer called Yang to inform him Microsoft was withdrawing its offer, and followed up with an official letter sent on Saturday afternoon.
Both sides made the best of the circumstances, arguing they could do well without the other.
"Without 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," Yang said in a public statement.
"Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo," Ballmer said in a letter to employees, obtained by Reuters.
Talks between the two companies could still resume if circumstances change, said one person familiar with the negotiations. But that won't be soon, the person added.