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Microsoft today abandoned its attempt to buy Yahoo!, after a short weekend of negotiations in which it raised its $44.6bn offer by $5bn.

Microsoft thinks the deal still makes sense, if not at the price - another $5bn - that the Yahoo! board wants. But it won't go hostile - as Yahoo! would engage in scorched earth tactics, it says.

So what next? Yahoo!'s share price will go down, probably a lot. Microsoft's share price will go up, probably a little. A shareholder suit or ten will probably be fired Yahoo!'s way. Yahoo! will continue to fail to convince as an independent entity.

And Microsoft? It says it has the firepower to compete on its own in the Internet world. But the company is a long way behind Yahoo!, let alone mighty Google, in Internet revenues. It could always buy AOL or, at a very inflated price, Facebook. Those options would make it a less weak no3., as opposed to the strong no.2 it would be if it owned Yahoo!. Microsoft is unlikely to return to sweet-talk Yahoo! anytime soon, unless the market and shareholders punish Yang and his board for their hold-out. But it will be waiting and watching.

Yahoo!, meanwhile, is talking like it's off the hook. Responding to Microsoft's withdrawal, Jerry Yang, Yahoo! boss, said that "with the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users."

Walk away

In a courteous enough letter, CEO Steve Ballmer today expressed disappointment Yahoo!'s refusal to entertain a new, enhanced offer of $33 per share.

Noting Yahoo!'s hold out for another $5bn, Ballmer said: "We believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal."

So why not a hostile takeover? Quite simply, Ballmer think it's not worth the effort, especially with the tactics Yahoo! says it will deploy. "Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft." he said.

Microsoft's main gripe with Yahoo is its intent to outsource search engine advertising to Google, in the event of a hostile bid. Microsoft thinks this would "undermine Yahoo!’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on your display advertising business to fuel future growth."

Such a deal would cause regulatory and legal headaches for any acquirer of Yahoo!, Ballmer says. Google, the dominant market leader, would gain even more share, and could raise prices at will.

"In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google." ®

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