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In an e-mail to employees this afternoon, a Microsoft executive disclosed details of the alternative proposal that Yahoo turned down yesterday before announcing its search-advertising partnership with Google. According to the message from Kevin Johnson, president of Microsoft's Platforms and Services Division, the company offered $1 billion for Yahoo's search assets, plus an $8 billion investment in Yahoo, at $35 per share.

See these earlier posts for statements from Google and Yahoo. Here's an excerpt from Johnson's e-mail to Microsoft employees, which also reads as a thinly veiled message to Yahoo shareholders.

During the last few weeks, we spent a considerable amount of time with Yahoo! discussing an alternative proposal around search. Specifically, this search proposal had three components:

Microsoft would have invested $8 billion in Yahoo! at $35/share;

Microsoft would have purchased Yahoo!'s search assets for $1 billion, and assumed the operations and R&D expense while returning data back to Yahoo! for use in their advertising business; and

Microsoft and Yahoo! would have entered into a long-term search partnership, where Microsoft would have provided favorable economics to Yahoo! search, including a three-year guarantee of higher monetization than Yahoo!'s Panama paid search system currently provides.

This partnership would have created a stronger competitor to Google, providing greater choice and innovation for advertisers, publishers and consumers. This approach could have been implemented quickly and would have simplified the integration process for both parties. It would have also established the basis for a long-term Internet partnership between Yahoo! and Microsoft.

We believe this proposal would have created compelling value for Yahoo! and its shareholders in at least three ways:

New Transfer of Cash to Yahoo! Shareholders. This proposal would have transferred $9 billion from Microsoft to Yahoo!, which could have been used by Yahoo! to reward their shareholders.

A More Profitable Ongoing Business. This proposal would have resulted in higher operating income on an annual basis for Yahoo!, with our projections more than doubling Yahoo!'s operating income in the first year of operation, and increasing it by more than $1 billion above its current operating income level.

A More Compelling Search Offering. The combination of the search platforms would have unlocked new R&D innovation, eliminated redundant engineering efforts and allowed for greater scale in serving our customers.

Unfortunately Yahoo! has chosen a different course, and yesterday announced an agreement that would start to consolidate over 90% of the paid search advertising market in Google's hands. This will make the market far less competitive. There are many experts who suggest that a host of legal and regulatory problems lie ahead for Google and Yahoo!.