Yahoo minus Microsoft: Ballmer slams the door on his way out

It is perhaps the biggest "no-go" in the history of the Internet industry. So in the absence of any Cinco de Mayo celebrations in Redmond, did Microsoft manage to move the needle in its direction in its fight to avoid becoming the #4 player?

Whether the idea was made popular by the ancient Chinese philosopher Lao Tse in the sixth century B.C., or by Michael Douglas' portrayal of "Gordon Gekko" in the classic 1980s movie "Wall Street," there's a notion that warriors don't enter into battles they haven't already won in advance. Maybe Microsoft CEO Steve Ballmer hasn't read up on his philosophy or hasn't watched much AMC lately; in either case, he's the one holding an empty basket today, after shutting almost every door behind him on the way out of the Yahoo negotiations.

From Ballmer's letter to Yahoo CEO Jerry Yang late Saturday, we now know one very interesting piece of information: Microsoft was only willing to raise its bid from $31 per share as of February 1 (a bid whose value dropped to just over $29 in the intervening period) to $33 per share, not the $35 bid as had been bandied about in the financial press late last week.

"After giving this week's conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders," wrote Ballmer in his parting shot. "This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. 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."

Yahoo's willingness to partner with Google to the extent of possibly outsourcing its search services to that company -- a partnership prospect that Google never acknowledged, but never denied either -- was what effectively killed the deal, according to Ballmer's letter.

"We regard with particular concern your apparent planning to respond to a 'hostile' bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo today," Ballmer wrote. "In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo undesirable to us."

Shortly afterward, Yahoo issued a statement with most of its commentary attributed to Chairman Roy Bostock, most of whose contents were surprisingly boilerplate. There was this addition: "From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view."

While a number of analysts, financial and otherwise, expected Ballmer's next step to be to pursue a proxy fight with Yahoo's institutional shareholders, it appears only the financial analysts and journalists at SeekingAlpha.com were capable of ascertaining that a great many of those shareholders and Microsoft's own were the very same shareholders. Specifically, Microsoft's five largest institutional shareholders by share volume are among Yahoo's top seven; Ballmer would have been essentially leveraging their capital to acquire what would have, in the end, been their capital.

In a note to Yahoo employees late Saturday written in his trademark all-lower-case, Yang made no indications of preparing his team for any such partnership. Instead, he credited his company's better-than-expected performance in the previous quarter for having demonstrated Yahoo could provide those extra few dollars of share performance entirely on its own.

"of course, we anticipate that microsoft's announcement will draw media attention and speculation as to what happens next for yahoo!" Yang wrote. "that means the spotlight will be on us - just as it has been for the past three months. i'm incredibly proud of how we've performed under such scrutiny, with last quarter's great financial results as a testament to everyone's hard work and focus. just as we did last quarter, now is the time for us to shine and show what we're made of."

But in a post to the Yahoo corporate blog on Sunday, Yang pointed out to customers that there a door leading to a partnership does remain open, albeit in the distance.

"So, what's next? With Microsoft's withdrawal, we'll be better able to focus our energy on growing our industry leadership and maximizing value for stockholders," stated Yang. "We'll continue to execute on our plan - making your Internet experience as personal, relevant, open and social as possible, serving advertisers so well they insist on working with us, and opening up Yahoo in a way that developers dream of. And, we'll also continue to pursue strategic opportunities that position us for long-term success."

In a statement over the weekend to the public, Ballmer also said that his company's future in the online space will depend on strategic partnerships. "We have a talented team in place and a compelling plan to grow our business through innovative new services and strategic transactions with other business partners. While Yahoo would have accelerated our strategy, I am confident that we can continue to move forward toward our goals," reads Ballmer's public statement.

Unfortunately for Yahoo's shareholders in the short term, its stock value has taken a bloodbath on the NASDAQ exchange Monday morning, trading down over 15% by 11:30 am EDT at about $24.25. Microsoft stock, meanwhile, was trading up a few ticks. At this point, it may be thankful to be waking up with ticks rather than, as a famous fictitious Wall Street tycoon once so aptly described, fleas.