Microsoft's Yahoo Offer: $8 Billion Stock Buyback; $1 Billion for Search

Oh, they’re plenty irked in Redmond today, in the wake of Yahoo’s (YHOO) picking of the Google (GOOG) ad-outsourcing deal over a proposal by Microsoft (MSFT).

And what exactly was that offer?

Well, according to people familiar with Microsoft’s thinking, the goody bag Yahoo turned down was considered by the company to be substantial.

It included, according to Microsoft sources:

• A cash offer of $1 billion for all of Yahoo’s search assets, including its paid and algorithmic search. But Yahoo would also be allowed to innovate in new arenas, like visual search. (This low bid was, most agree, kind of a direct insult to Yahoo techies.)
• A commercial deal to serve Yahoo’s search and search-ad business with a guaranteed economic return that was higher than what Yahoo currently earns with its Panama system.
• An offer to buy up to $8 billion of Yahoo stock for $35 a share from investors like Carl Icahn and others.
• A guarantee to allow Yahoo to keep all data collected from search and search ads, in order to help its display ad business.

Overall, sources said that Microsoft estimated that the deal would improve Yahoo’s operating income by $1 billion.

The smaller Google deal has a lot less in terms of bells and whistles, but allows Yahoo to keep its search business intact.

Microsoft sources say execs were stymied by Yahoo, which offered to sell the entire company to Microsoft up until three days ago.

But, as Yahoo has even said, Microsoft remained steadfast in its lack of interest in a bigger deal, after it walked away a month ago from its botched takeover attempt.

And it is still not interested, even with the pressure a Yahoo-Google partnership now presents.

“Yahoo might still dream of a big deal and hope they can win this game of chicken by doing this deal with Google,” said one person familiar with Microsoft’s thinking, about the possibility of Microsoft now making another offer. “But the big deal is done.”

Even if Yahoo’s stock declines even more precipitously? “It’s no longer a price issue with Microsoft,” said the source. “The company has moved on.”

The source, like many, predicted intense regulatory opposition to the Yahoo-Google hookup from the software giant now.

No kidding!

“It’s war,” said another source. War is a nice way of putting it.

(Here is a sharp analysis of the offer by Henry Blodget of Silicon Alley Insider.)