has explained why it rejected


(MSFT) - Get Report

offer to buy its search business, pointing specifically to a 10-year exclusive arrangement that would have forced Yahoo! to become dependent on Microsoft for search.

In a letter to shareholders on Wednesday, Yahoo! provided more details on the deal that Microsoft had proposed as an alternative to a merger, which involved a $1 billion payment to acquire Yahoo's search business and a share of future search advertising revenue instead of buying the entire company for $47.5 billion.

Yahoo! noted that the alternative proposal would have required Microsoft to make an $8 billion investment in the Internet company, but it would have also required Yahoo! to remain bound to the arrangement for 10 years.

"It would also have given Microsoft veto rights on certain future Yahoo! actions, including the sale of Yahoo!," stated the letter, signed by Yahoo! Chief Executive Jerry Yang and Chairman Roy Bostock. "Our board of directors and management made a great effort -- and conducted in-depth negotiations -- to elicit a feasible proposal from Microsoft that made strategic and finance sense for Yahoo!, but without success."

The company further argued that while the search deal would have benefited Microsoft, "it would have had a significant adverse impact on Yahoo! strategically, leaving the company without the operational control of search assets and technology we view as critical to our objective of becoming a leader in the converging search and display advertising business."

Microsoft has maintained that the search deal would have ensured competition in the marketplace while providing greater choice and innovation for advertisers, publishers and consumers. Yahoo's board, however, concluded that the arrangement "would have provided no meaningful improvement to our operating cash flow."

"In short, this proposal would have generated substantially less value for Yahoo! shareholders than Microsoft has suggested," the letter said.

Yahoo! is making its arguments as its annual shareholder meeting on Aug. 1 fast approaches. The company is trying to sway investors to retain its current board of directors and reject an alternative slate put together by billionaire investor Carl Icahn, who had been pushing for a Yahoo!-Microsoft merger.

Yahoo! maintained that Icahn would not be able to convince Microsoft to come back to the table to negotiate, noting that Microsoft has repeatedly stated that it's no longer interested in a merger. Recent media reports continue to speculate that a deal is still possible, however, which has helped to prop up Yahoo!'s stock in the last couple of days.

Yahoo! also defended in the letter its decision to outsource some of its online search ads to


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, which it announced on the same day that it rejected Microsoft's offer to buy its search business. Through the arrangement, Google would place ads alongside Yahoo!'s search results at Yahoo!'s discretion and the two companies would share the revenue.

Yahoo! said the Google deal "is far better than Microsoft's search-only hybrid proposal," noting that the company may stand to generate $250 million to $450 million in incremental operating cash flow in the first 12 months following the implementation.

"Combined with continuing advances in our own search capability, the agreement is an important step in our efforts to capitalize on the high-growth online advertising opportunities where we are best positioned to compete successfully and create more value," the company said.

Some analysts have rejected Yahoo!'s claims, saying the company has basically rolled over when it comes to search and now it has handed over more of the business to Google, which already far surpasses its rivals.

Shares of Yahoo! were down 1.2%, or 26 cents, to $21.75 in after-hours trading.