To: Steve Ballmer, C.E.O., Microsoft
From: Jack Flack
Subject: Lock & Roll

You were trying to do a rational deal with an irrational target, and you got fed up with the whole passive-aggressive circus. So what? Ignore it all, and do not let the events thus far sour your ability to make good, objective decisions about how to move forward.

The reality is that you are in a far better spot than you have been during this entire process. The minute Carl Icahn walked into the center ring, you were no longer the scariest animal in the tent, which changes things considerably.

Now you not only have the opportunity to get the deal done on agreeable terms, but also to restore your reputation as a passionate, decisive guy who ultimately gets what he wants.

1. Be Ballmer. Understand that you will be second-guessed no matter which strategic path you take or how adroitly you travel it. Each path has its own set of advantages, but each also has its own set of troubling implications, which is what will be scrutinized. So trust your instincts about what's best for your business over the long haul, and then act with conviction. Do so with the same nutty energy that inspired Bill to hand the keys over to you in the first place. (Though I would suggest this would not be a time for updating your Monkey Dance, at least in public.)



2. Re-center in the new reality. Understand that the other parties now actually need you to buy all of Yahoo. Jerry Yang and Roy Bostock need you to do it to avoid having Carl pluck their appendages off one at a time. Carl needs you to do it so he can get a complete pelt to hang on the wall. And Bill Miller, T. Boone Pickens and all the other big shareholders need you to do it to salvage the paper premium they had already banked, at least emotionally.
   
   Keep reinforcing the idea that landing Yahoo was not a strategy in itself, but simply a unique means of taking a huge leap forward in creating the scale required to make your strategy happen. That will continue to invite cynicism in the short term, but it will be essential in contextualizing future moves.
   
   Understand the potential Yahoo-Google alliance for what it is, and do not let it spook you. If you do acquire Yahoo, there are plenty of ways to undo that agreement, particularly with the antitrust implications. If you don't acquire Yahoo, then the competitive reality will allow you to turn the alliance into a full-blown regulatory Waterloo for Google.
   
   Should Google proceed with that search alliance, I'll write you another Rescue Memo dedicated specifically to how you can make them really wish they hadn't. I like those guys, but they still don't understand that domination has its downsides.
   
   Some have said that you were probably too eager to re-engage after Icahn gave notice, and they are probably right. So, you must make your negotiations for the smaller deal go as slowly as possible.
   
   Why? Because "winning" actually means nothing more than securing the assets you specifically desire at an acceptable price. You can do that one of two ways—either buy the whole thing and then pare it down, or start with a smaller deal and expand from there. The former would be far more pragmatic, given the lack of shareholder patience for anything short of the deal you offered originally. In fact, in this environment, the latter looks downright unachievable.
   
   Thus, you must...



3. Lock publicly at $33. Send Bostock and the rest of the world a short statement that reads something like this.
   
   

   Redmond, Washington — Microsoft confirmed today that it would embrace the opportunity to acquire Yahoo for $33 per share.
   
   "It was worth $33 before, and it's still worth $33 today," said C.E.O. Steve Ballmer. "We think it's a good, fair deal that will allow both partners to become competitive again in search. And yes, just as before, we are not willing to go higher. Anyone who thinks we're bluffing has a very short memory."

   
   
   By doing that, you confirm that you've got consistent, logical criteria for the deal. You establish yourself as a non-variable within a very complicated collection of decision-makers, forcing the other players to maneuver in response.
   
   You also fully shift the burden of action to Carl, who knows exactly how to shift it to the Yahoo board.
   
   If you want to lock at $34 instead, you'll need to offer a clear explanation of what additional value has been discovered since you walked.



4. Keep going. Even before you close the deal, you must demonstrate that you have a clear plan for actually doing something with the new scale in search.
   
   Immediately disclose which Yahoo assets you'll divest, either because they're non-strategic and will reduce the cost of the deal, or because you anticipate resistance from the regulators.
   
   Make it clear that achieving scale was the first part of the search advertising strategy, and the second part of the strategy is using that scale to offer a differentiated alternative to Google.

If you're going to augment your new scale through a deal with AOL, do it quickly so that it will be seen as the next step in a planned series. If you don't make that happen within a year, it will instead be negatively judged as an attempt to fix an insufficient Yahoo transaction.

In the overall game, I'm assuming that maximizing your profits from your search assets is far less important to you than spoiling Google's cash engine. As the challenger in search, that gives you plenty of options on how to take additional share.

Oh, one last thing: The next time somebody tosses eggs at you, the proper rock-star C.E.O. response is to make a quick quip like, "Thanks, but my doctor says I can only have two of those a week."