Microsoft Walks

As expected and discussed, Microsoft did raise its offer to $33 a share. Also somewhat to be expected, Yahoo! wanted more money. What was not expected was how Microsoft decided to not go hostile, and simply said see you later, it is time to move on. Given that the current negotiations had gone on too long, and that a hostile bid would have probably destroyed value for each company, I imagine that right now many Microsoft shareholders and employees are cheering. While some Yahoo! employees are also probably happy with their new increased level of job security (for now), and being able to avoid a forced culture clash between the two companies, I am sure that many Yahoo! shareholders are beginning to considering new lawsuits, besides those already in process. To not take a $33 a share price to the shareholders for a vote will certainly get the activists and lawyers interested.

In the end, Ballmer held to his reputation of not messing around, being upfront, and playing tough but fair. He did give a little, but in the end stayed true to his word. A lot of people were talking about how both Microsoft and Steve Ballmer needed this deal, yet he was still not willing to overpay. Walking away may end up being the smartest thing Ballmer did. By sweetening the deal by $5 billion, and also deciding to not go hostile, Ballmer has put Jerry Yang and the Yahoo! board on the defensive. Monday trading should be interesting, as some are already expecting Yahoo! to fall to $20 a share or less. Yahoo! will certainly continue to tout the increased revenue earned from farming-out ad revenue to Google during its recent trial run, but Yahoo! will need to have more to offer current shareholders in order to convince them that value and cash was not left on the table. This may end up being more difficult than negotiating with Microsoft.

Losers: Yahoo!
Winners: Google, Time Warner, News Corp., and possibly Microsoft if they play their cards right in the next few months

Expect Microsoft to possibly make a play for AOL or MySpace in due time. Expect Yahoo! to try and generate further relationships with Google. Whether Google continues to cooperate, and to what extent given that Microsoft has walked away, will be interesting to watch.