Microsoft's Walkaway Wins Investors' Favor

SAN FRANCISCO -- MicrosoftMSFT made the best choice by withdrawing its buyout bid for Yahoo!YHOO on Saturday -- even though jilted Yahoo! shareholders still hold out hope.

Shares of Microsoft were up 53 cents, or 1.8%, to $29.77 on Monday; Yahoo! shares -- down as much as 20% earlier in the session -- were off 14% to $24.63, as investors registered their dismay at losing the buyout premium.

In a letter to Yahoo! CEO Jerry Yang that was made public over the weekend, Microsoft CEO Steve Ballmer revealed that he was willing to go as high as $33 a share -- $2 above his initial cash-and-stock offer -- but Yahoo!'s board had held out for $37.

For Microsoft, that's the right decision, according to Technology Business Research analyst Allan Krans, who estimated that each additional dollar added to the offer price cost Microsoft in the neighborhood of $1.5 billion.

While the legal expense of a proxy fight to take control of Yahoo!'s board, as Microsoft had threatened, would have been negligible, "the real risk is destroying some of that value [of the acquisition]. Those indirect factors played the largest role. The downside risk is what happens to all the employees" during a hostile takeover battle, Krans says.

Microsoft Leaves Yahoo! at the Altar

And, should Yahoo!'s stock price lag at its pre-bid price range for the next six months, Microsoft may yet be able to pick up the company on the cheap.

A lower price for Yahoo! would make Krans more accepting of Microsoft's desire to sink such a large investment in its online division. He said he doesn't see a deal becoming less attractive to Microsoft if Yahoo!'s market share and price continue to erode. "Nothing can happen over the next six months that will change the fundamentals of Yahoo!. If they can cut a third of the price off the transaction it may benefit Microsoft," Krans said. "I'm sure they'd love to pick up Yahoo! for $25 billion."