The 5 Dumbest Things on Wall Street: May 9

5. Know When to Fold 'Em

Has Steve Ballmer called Jerry Yang's bluff?

The Microsoft (MSFT Quote) CEO walked away from the brink last weekend by refusing to pay Yahoo!'s (YHOO Quote) asking price to buy the Internet giant in a deal that would have resulted in a new rival for Google (GOOG Quote).

Microsoft raised its offer in last-ditch negotiations to $33 a share from $31, but then it balked after a foolhardy Yahoo! demanded $37. Jerry Yang, Yahoo!'s CEO and co-founder, now faces the wrath of shareholders at the company's annual meeting on July 3.

There are already rumblings of a shareholder revolt at the meeting, and Yahoo! shares -- after dropping 20% after the deal fell through -- have rebounded by 14% over the ensuing week as rumors swirled that a deal was still in the works.

For his part, Yang tried to dispel the popular notion that he wasn't open to a deal with Microsoft at any price.

"We as a company and I personally have always been open to a deal with Microsoft and I hope that in the the last few days it was clear that we have shown we're willing to do a deal with Microsoft but that we couldn't get to an agreement on price," Yang said.

But if Yang wanted to do a deal, he blew an opportunity to accept a good one when he refused Microsoft's higher offer.

"I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares," Ballmer wrote in a letter to Yang. "By failing to reach an agreement with us, you and your stockholders have left significant value on the table."

Ouch. Yahoo! passed up a 70% premium to its market price as of Jan. 31, the day before Microsoft unveiled its $44.6 billion bid. Yang walked away from a good deal, and Ballmer walked away from a bad deal. Who's left holding the bag?

Legg Mason Value Trust manager Bill Miller, a major Yahoo! stakeholder and a vocal supporter of Yang in the negotiations, recently revealed that his fund lost 20% in the first quarter on bad bets in the financial sector. Legg Mason (LM Quote) swung to a first-quarter loss of $256 million from a year-ago profit of $173 million.

Miller is hoping Ballmer will return to negotiations.

"If I'm sitting in their shoes, I'll go away and see what happens," Miller said of Microsoft. "I can come back, and the worst case is, I'll pay six months more of my free cash flow."

Dumb-o-meter score: 68. You never count your money when you're sitting at the table.