Takeaways from busted Microsoft-Yahoo deal

By Wendy Tanaka

updated 6:13 p.m. ET May 5, 2008

Burlingame, Calif. - Microsoft's three-month quest for Yahoo came to a close Saturday as the software giant withdrew its multibillion-dollar bid for the Internet portal, confounding industry observers. They had placed bets on two other scenarios: a friendly merger between the tech titans at a higher price than the $31 per share Microsoft had originally offered, or a hostile takeover from Microsoft. Here's what happened — and what's next.

Why did the deal fall apart?
Microsoft and  Yahoo could not agree on an acquisition price. Microsoft Chief Executive Steve Ballmer and Senior Vice President Kevin Johnson met Yahoo co-founders Jerry Yang and David Filo in Seattle on Saturday to negotiate. Ballmer raised Microsoft's offer to $33 a share but Yang, Yahoo's chief executive, wanted $37. After the meeting, Ballmer sent a letter to Yang stating Microsoft's withdrawal and adding that "a deal is not to be."

Did Microsoft do the right thing by walking away?
Probably. Microsoft offered a hefty premium to Yahoo's price. The software titan's original $31 a share offer on Jan. 31 was a 62 percent premium to the Internet portal's stock price on that date. Microsoft said its last offer of $33 would have added another $5 billion in value to the deal. The deal was originally valued at $45 billion, but in the ensuing months, it fell to $42 billion as Microsoft's stock price dipped.

(Msnbc.com is a joint venture of Microsoft and NBC Universal.)

Did Yahoo do the right thing by not accepting Microsoft's higher offer?
Probably not. Yahoo doesn't have an alternative deal that would return as much to shareholders.

How will Wall Street and shareholders react?
Yahoo's shares likely will take a beating. Analysts expect the stock to fall back to $19, the price it was trading at when Microsoft launched its bid. By contrast, Microsoft's shares likely will rebound above $30.

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Yahoo has already been hit with shareholder lawsuits and should expect more. Microsoft's shareholders aren't expected to sue, but they're anxious to know how the company plans to boost its stock.

What's Microsoft's next step?
It will pursue other acquisitions. In a meeting with employees last Friday, Ballmer indicated that he'll turn his attention to other companies. "If the Yahoo deal doesn't happen, we know that there's a different set of things that we'll wind up investing in," he said. "Yahoo is not a strategy; it's part of a strategy." And Microsoft is no stranger to acquisitions: it has bought hundreds of companies in its 33 years.

Who else might Microsoft buy?
Speculation is swirling about Microsoft might be interested in acquiring AOL from Time Warner or MySpace from News Corp. Trip Chowdry, managing director at Global Equities Research, wouldn't name names, but says Microsoft will seek out up-and-coming companies that have innovative technologies and also generate revenues from either licenses, transactions, subscriptions or advertising. "Microsoft will acquire a portfolio of companies beyond Web 2.0 plays," Chowdry says. "Microsoft doesn't want to fight yesterday's story; it wants to capture the future."

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