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Microsoft, Yahoo Can't Close Deal


The pros and cons of the stalemate.

It looks like Microsoft (MSFT) CEO Steve Ballmer is taking Yahoo (YHOO) off his favorites list.

While some thought that negotiations over the weekend might lead to Microsoft and Yahoo getting hitched, it looks like it's just not going to happen. News reports suggest that Mister Softee withdrew its bid for the well-known portal/search engine after talks apparently failed to produce a mutually agreeable price. According to Bloomberg:

Microsoft was willing to offer as much as $33 a share, but Yahoo was looking for $37. And after a face-to-face between the two parties, Microsoft issued a statement which said, "After careful consideration, 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.''

Let's examine the pros and cons of the deal not getting done.

The Pros:

In Microsoft's defense, reports suggest it would have had to cough up an extra roughly $5 billion and change (from about $47.5 to $53 billion) in order to match Yahoo's demand of $37 a share. Frankly, that's an awful lot of money these days even for Mister Softee. Plus, that money might be better spent well elsewhere (other acquisitions, development, etc).

From Yahoo's perspective it remains free - free to continue to pursue its turnaround strategy and to grow and hopefully garner a stock price in excess of the Microsoft offer. With Jerry Yang back at the helm, there's certainly a feeling that the company could indeed go it alone.

The Cons:

As stated above, $5 billion (more) would have been a lot of money. However, for that money, Microsoft would have gotten a big name, well-known enterprise that's up and running and has some mighty smart people working for it. Not to mention that it could have given Microsoft a leg up in online services. Now it has to go on the prowl again or build. Neither is an overly attractive option.

With regard to Yahoo, the fact that it let this deal slip away is kind of unbelievable, particularly given Google's (GOOG) deep pockets and competitive nature. It also, one might argue, sort of puts Yahoo's Yang in a bit of a pickle. That's because Yang was supposed to represent the way forward and help Yahoo's stock rebound using any and every measure. Will some shareholders be upset with him? That could be a safe bet.

So what does Yahoo have now? With the allure of teaming up with Microsoft seemingly out of the picture, Yang and crew need to come into work this morning with a "plan B." Look for Yahoo to be under pressure at the open.

The Potential Upshot:

Don't be surprised if in the weeks and months ahead there's some insider buying at Yahoo. That's because, with the deal talk done, there could be a trading window. Plus, one could argue that Yang needs to prove his commitment to shareholders. Long story short, this could provide the stock with a bit of a pop.
No positions in stocks mentioned.

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