May 6, 2008 | posted by Michael Baxter in New Media |

And the man from Microsoft, he said “no.” And so that’s it, at the end of last week Microsoft walked away from the deal with Yahoo. Silly old Yahoo, it stuck out for too high a price. Microsoft had warned it was getting impatient, and so it was.

In the end it came down to just a few dollars. Microsoft upped its offer to $33 a share, from $31, Yahoo said it wanted $37, and the giant software company walked. Okay, the difference between $33 and $37 dollars might come down to around $5bn or so, but the two companies were in the same ballpark.

Yahoo’s shareholders are furious. Shares in Yahoo went crashing, falling back to $24, or so, and some are talking about suing the company. Legg Mason, the second biggest shareholder in Yahoo said that the company should now compensate shareholders for the fall in share price. It wants to see the company buy back shares. “It would be almost incoherent not to do so,” or so the Guardian quoted a spokesmen for Legg Mason. “You can’t maintain that $33 undervalues your company, have your stock trade below that and not buy back stock.”

And yet, look a little deeper, and a somewhat different picture emerges. This is what Yahoo CEO Jerry Yang said, “We did not say it was a take-it-or-leave-it number in the sense that we would never negotiate any more,” said the yang to Microsoft’s yin, and added, “We were totally willing to do a transaction, and they walked away.”

Analysts voiced surprise that the two companies were unable to do a deal, when they were so close. And yet, from another point of view, you can argue that Microsoft’s strategy has been totally predictable – and they are in fact playing their cards like a master poker player.

Microsoft’s Chief executive Steve Ballmer is known for his somewhat …, how can we put it, somewhat confrontational approach. Earlier last week he had warned that if Yahoo didn’t accept the offer, he might lower the price. Rumours suggested he was trying to elicit support from Yahoo shareholders. The truth is, Yahoo had been losing its battle. Google seems to be trouncing it at every stage. And then it resorted to canoodling with Google, getting its arch rival to sell some of its advertising. In the long-term, this is a risky strategy. Yahoo was an early investor in Google – and helped the company grow. In the end it turns out that Google was like a cuckoo in the nest, proving far too much of a handful for its earlier mentor.

But Yahoo has not learned from that lesson. Yet antitrust regulators will almost certainly stop the two companies ever coming together. A merger with AOL is on the cards – but, frankly, so what?

There is only one company in the world that can compete with Google and that company is called Microsoft. Only as a part of Microsoft, can Yahoo hope to have a viable model in the long-term. Microsoft surely knows this, and will surely be back – but when it does return, it will be laying a lot less money on the table.