via The Wallstreet Journal.com


The following are excerpts of a transcript from a meeting Microsoft
Corp. Chief Executive Steve Ballmer held with Microsoft employees May
1. The company disclosed the comments in an SEC filing. The filing
only includes excerpts related to Microsoft's bid for Yahoo Inc.

STEVE BALLMER: Yeah, anybody live got a question, fine, I'm going to
take the first question that was presubmitted. Forty percent of our
questions basically are these two.

We've been reading a lot about the Microsoft-Yahoo! deal in the
newspaper, and recently read a few articles about Yahoo! partnering
with Google to avoid being overtaken by Microsoft. As an employee, we
would like to understand what's there in Yahoo! that is attracting
Microsoft to buy it.

Two, related, what are our plans to quickly get onto number two
position if the Yahoo! bid doesn't work?

I'll consider that open season to kind of talk about what we're
trying to get done with Yahoo! — not open season on Yahoo!, open
season on what we're trying to get done — (laughter) — with Yahoo!

There's a few things people have to have in their minds, because it's
really important, and then I'll give you a context as to the tactics
and what's going on in the newspaper.

We are absolutely 100 percent determined to build the most
interesting position in the world in online advertising, media, and
the kind of social connected search and media experiences that go
along with that.

The future of the way people consume information, the way people
socialize and connect is going to change a lot more in the next 10
years even than in the last 10. How you find information, how you
consume it, how you share it and connect with your friends while
you're in the middle of that, how it gets paid for using advertising
and other techniques, dramatic changes. We are absolutely committed
to be the leading player in that endeavor.

We are not today the leading player. We are not irrelevant, but we
are not the leading player. We're committed to go do that.

I think we've got very talented, bright people with very good ideas,
and yet there are some real, what should I say, structural things in
the industry that make it hard to make rapid progress. Some of it has
to be our innovation, some if it has to be our willingness to invest
not only in innovation but in marketing, in image, in brand. Some of
it is our willingness to invest in distribution.

Every Dell machine we buy at home that comes with the Google toolbar
it's not a good day in my family when that happens, but Google pays
for that. And there are some things that give them some financial
wherewithal and advantages in a lot of things.

So, we're committed, but we're always asking ourselves what does it
take. The truth is it takes a lot of things.

We think for us to be there, to be important, not just in search but
in this broader area of the future of commissions, media, and
advertising in the consumer world it takes us being willing to what
I'll call do the basics very well.

We are going to have as big an index as we need to have in search,
we're going to provide the storage people need to have when they
communicate, we have to be willing to do what I would call the basics
or the openers very, very well.

That's expensive. That is actually an expensive game. We're entirely
committed to it. Recession, no recession, it's a long term thing,
boom, let's go after it, no question.

Number two, we need to innovate in what I would call quick waves. I
love our news search. Google can go copy our news search if they want
to. It's not a permanent differentiator. But in a short term basis it
makes us shine, people say, yeah, they're really thinking, they're
driving, they're pushing. It's the kind of thing that can help us
build presence in users and brand.

Then number three, we need to change the game. We need to change the
basic experiences of how people communicate, how people consume
information, how people find information, not just in search but in a
lot of different areas.

Online reading is not as good as offline reading. You've been looking
at the same 10 darn blue links with a couple of ads in search, ours
and the other guys for years. There's so much that's going to happen
we have to be part of the reinvention.

Then number four, number four, we do need to gain scale, because I
said there are some things structurally that really benefit the guys
who have the most scale.

So, we have a strategy and we have ideas in each one of those
categories, things that we're doing, strategies that we're working
on, that we're excited about, and believe me, the world is rooting
for us.

Just like when we're strong the world roots for the number two guy;
in this case the world hopes there's a very strong person in the
world, very strong company that's not the number one guy, which is
very good for us.

So, we have a strategy and we're going to work the strategy, we're
going to work that strategy with Google (laughter) — I mean — with
Yahoo! or without Yahoo! We certainly would prefer it working without
the other guys — but with or without Yahoo!, we're working that
strategy.

Why buy Yahoo!? Yahoo! is a way to accelerate some of the other
goals. It gets us scale of advertisers, it gets us search query scale
more quickly. We've said very clearly that our goal would be to keep
all the engineers in both places, it helps get us scale where in some
of the areas of search and advertising where frankly we've got more
things than we want to do than we can get to today. So, it helps with
scale.

Yahoo! is not a strategy; it's a part of a strategy. It helps with
some of the elements of speed and scale and acceleration in the
strategy that we're on.

We're willing to pay for that at some level, and beyond that level
we're not willing to pay for it. Okay, we're not crazy. We've got all
the shareholder interest, will you pay arbitrarily? I get even mail
from friends of mine, "Oh, are you under immense pressure to go
increase your price?" No. I know exactly what I think Yahoo! is worth
to me, exactly. I won't go a dime above, and I will go to what I
think it's worth if that gets the deal done.

We've had blah, blah, blah back and forth, newspaper stories. Then
there was the magic Saturday night deadline. (Laughter.) I'd make
jokes about missing deadlines; unfortunately, some of them hurt me
too much.

No, we set a deadline of Saturday night, we wanted to make sure it
was clear, because at some point there's not any new news in the
equation. Saturday night came and gone, and there were some
interesting things that we wanted to be able to flesh out, discuss
with our board, and we're in the process then of going forward and
taking the next action.

I report nothing, I've got nothing to say today. We have basically
the two big options or three big options in front of us. There's a
friendly deal. That's a deal where both companies say this is a good
price, and then Yahoo! shareholders get to vote on it.

There's an unfriendly deal. In an unfriendly deal we basically can't
reach an agreement with Yahoo!'s board, and so we directly tell our
shareholders that we would like them to accept that deal, because
ultimately it is the shareholders, not the management and the board,
that owns the company. There's a lot of downsides and some upsides
associated with that.

Then the third path is simply to walk away. Given it's just a part of
a strategy, if neither of those look good, we walk away.

And we're still working on strategy. We just don't get some of the
acceleration that I think makes sense.

Now, I think the offer we made makes sense, makes sense to us. I've
got plenty of data from plenty of smart guys and plenty of my own
independent look at it. It makes sense at the price that we proposed,
and I think it's a very good deal for Yahoo!'s shareholders. I think
it's one of those things where everybody could say, hey, this is a
fair deal. It's a huge premium to what Yahoo! was trading at. It's
one of the largest valuations of any company in the world. It's large
relative to Yahoo!'s earnings. It's a heck of a deal.

It may or may not close. We ought to know something in not too
distant order — know something. We ought to announce something in
relatively short order. I don't think people who work in our online
group have anything to fear from this proposition. I think this is
just another tactic that we are exploring, one that we cannot explore
very privately, it's one we have to explore fairly publicly, and then
we'll know where we are, and we continue to move.

In the meantime I continue to see the great work coming out of the
online teams, which is fantastic. We continue to work hard selling
the advertising inventory. I had a chance to meet with advertisers
and media company executives in four different countries in Europe
last year — last week rather. I'm impressed by the kind of
relationships we have.

We are important to them. So is Google, but when you really get down
to it, there's really just a couple of us that are really substantive
in Europe, Google and us, in the United States it would be Google,
us, and Yahoo!, and then in various other countries it would tend to
be one of us or two of us. There's actually very few countries, other
than the U.S., where all three companies have a deep footprint.

So, there's nothing definitive to say today, but that's kind of where
we're coming from. We have a great plan and strategy. But we've got a
long way to go. Nobody should be confused. We are not number one, and
number one is a lot bigger than we are. You know, we have been a
distant number two in businesses before. It's been a long time. There
may not be many people in the room here or on the conference that
remember when we were a distant number two in networking, or a
distant number two, and it does take some patience, it does require
breakthrough insights, you can't just follow the other guy, but you
can't be afraid to follow the other guy, you've got to be willing to
look outside the box. Yahoo! is way — $44 billion outside of our
normal box, since that's about what we offered. But that shows more
about our commitment. And if the Yahoo! deal doesn't happen, we know
that there's a different set of things that we'll wind up investing
in.

And our shareholders probably better understand our overall
seriousness about online than they even did before we offered 44
billion bucks. It's a little hard to be confused about how serious we
are about this opportunity.

So, with that, I'm going to end my Yahoo! speech/answer, and open up
for real questions.

*************

I'm going to take another one. I actually want to just take one more
part of the Yahoo! question. There was something in there about what
about Yahoo! and Google doing a deal.

I don't know what Yahoo! and Google are doing. There have been rumors
of potential Yahoo!-Google deals. There have been rumors of potential
government review of Yahoo!-Google deals.

I mean, the fact of the matter is as a company that is a market
leader in some markets, your ability to actually make deals with the
number two guy, where they agree to not compete with you, that's
usually kind of tricky, I think, but I don't know anything about the
specifics of Yahoo! and Google.