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
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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."
The one aspect where Microsoft does lose ground is on the time-sensitivity of its online growth strategy, Krans says. "
will have another couple months, perhaps years to extend its lead."
For now, Microsoft will either have to pour more money into growing its online division organically to gain search-advertising market share against Google, or buy a less-attractive target, such as AOL, a division of
Even vocal Yahoo! shareholders saw the sense of reason behind Ballmer's decision not to take the risks of going hostile. "It's not completely surprising to me," that Microsoft chose not start a proxy battle, says activist shareholder Eric Jackson, who had been urging Yahoo! to accept the deal. "There was a lot that made that risky for them. It had the possibility of this dragging on and being a distraction for both sides -- and being costly in terms of losing talent at Yahoo!, in terms of morale."
Although "disappointed and angry" with the decision-making of Yahoo!'s board, Jackson has hope that a deal will still be struck. "I would bet that this isn't the end for Microsoft, because these two are a good match for each other." Jackson doesn't believe Microsoft can achieve its online search-advertising targets without Yahoo!
In research notes Monday, sell-side analysts applauded Ballmer's restraint, which stands in stark contrast to other tech deals gone hostile.
With a deal out of the way, Goldman Sachs reinstated a buy rating on Microsoft at a target price of $38. The company had suspended its rating after the offer was announced more than three months ago. Analyst Sarah Friar wrote that she expects shares to get a boost from Microsoft's decision to walk away.
The stock has been down significantly due, at least in part, to the pending deal. "The decision to drop its offer for Yahoo!, at least for now, suggests that Microsoft has remained more price disciplined than investors may have feared," Friar wrote. The company is an investment banking client of Goldman Sachs.
"Yahoo! threatened to undertake something of a scorched earth strategy in defense of a hostile tender, essentially threatening to destroy the company's value to MSFT," Sanford Bernstein analysts wrote Monday. "In this light, we are ... actually are quite satisfied with Microsoft's decision and decision-making."
In recent years, some suitors have taken out big targets in spite of huge opposition both at the target and internally.
CEO Larry Ellison ultimately won PeopleSoft in a bloody hostile takeover. And as CEO of
, Carly Fiorina successfully engineered the buyout of Compaq -- albeit at the ultimate expense of her job -- in spite of a bruising internal fight that split the H-P board publicly.