Microsoft-Yahoo! Is Only Mostly Dead

SAN FRANCISCO -- Pundits have now written the obituary for the Microsoft(MSFT)-Yahoo!(YHOO) merger. But is it really dead forever?

The deal that Yahoo! shareholders so desperately wanted -- and Microsoft shareholders hated -- seems to have entered no-chance territory after Microsoft announced Thursday that the two companies couldn't reach any sort of deal.

Yahoo! investors quickly showed their dismay. The stock dropped 10% to end Thursday's session and was down another 6% in Friday trading.

Microsoft investors welcomed the news that a potential deal, with its attendant integration costs, was no longer a looming threat, adding $1.21, or 4.3%, to $29.45 in recent trading, for a two-day gain of $2.33, or 8.6%.

Microsoft's decision to walk away is "good news" for its stock, says Nick Patience, analyst with the 451 Group. "The deal always looked slightly on the desperate side of things." He questioned the wisdom of buying a struggling online services company when its own wasn't able to grow in the face of Google's(GOOG) strength.

Microsoft has long maintained -- and correctly so, it appears -- that Yahoo!'s stock has been artificially inflated by the prospect that a merger between the two would happen. Many investors believed that if a deal didn't' happen -- and Yahoo! fell back to a realistic price -- Microsoft would be back knocking on the door.

But Microsoft is now sending a different message, saying Thursday that it "was not interested in rebidding for all of Yahoo!." Rather, "our alternative transaction remains available for discussion."