“Will you walk a little faster,” said a whiting to a snail,
“There’s a porpoise close behind us and he’s treading on my tail.
See how eagerly the lobsters and the turtles all advance,
They are waiting on the shingle, will you come and join the dance?

Will you won’t you, will you won’t you, will you join the dance?
Will you won’t you, will you won’t you, won’t you join the dance?”

Microsoft’s urgent pursuit of Yahoo turned out not to be particularly urgent, when Yahoo rejected an upgraded bid of $46 billion for Yahoo. This was a generous $5 billion more than Microsoft’s January offer, but $5 billion less than Jerry Yang, Yahoo’s CEO, was willing to accept. So Microsoft CEO, Steve Ballmer, left the negotiating table and declared “no further interest” in Yahoo.

As a consequence, Jerry Yang is likely to attract heavy flack from his shareholders. Yahoo’s stock will surely collapse to the $20 per share value it had before Steve Ballmer gave Yahoo a wink and smiled sweetly – which means that Yahoo will be worth less than two thirds of what it would have been worth if Jerry Yang had accepted Steve Ballmer’s amorous overtures.

Ballmer has abandoned the idea of a hostile marriage through a protracted proxy contest, wisely in my view, because Microsoft was going to have corporate culture problems – even with a friendly takeover that was blessed by at least some of Yahoo’s executives. A successful hostile assault would have seen a good number of valuable Yahoo staff walk away.

Yahoo seem delighted with the turn of events. Yahoo chairman Roy Bostock said, “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.” Well, we’ll see what the shareholders think in the cold light of Monday morning. The only factor that’s likely to keep Yahoo shares anywhere near the current price is the possibility that Steve Ballmer might think again in a few months. But if he does, he’s gonna think again at a lower price.

If it’s really over:

If Microsoft really has washed its hands of the matter then Google can rest easy, because Microsoft really doesn’t know how to compete with Google in web advertising and will trail far behind, gradually receding into the distance. Yahoo doesn’t have much of an idea how to stop the Google juggernaut either, but at least if it threw its lot in with Microsoft, they would be a more credible competitive force with sufficient funding to try to take Google on. Yahoo is after all, the top ranked US site with traffic above 100 million unique visitors every month. That’s more than Google, believe it or not.

In order to counter Microsoft’s offer, Yahoo has been out trying to partner with Time Warner (with AOL), News Corp. and Google itself. All of this makes commercial sense, but neither Time Warner nor News Corp can hope to acquire Yahoo, and partnering with Google is likely to provoke anti-trust complaints. A genuine Yahoo-Google alliance would corner 90% of the search advertising market. Microsoft would be inclined to complain – and before you start saying “pot-kettle, kettle-pot” – remember that even the ship’s cat has a right to complain about monopolistic behavior.

If Yahoo is going to pull itself out of its decline, its going to have to do so by pulling on its own boot straps.

If it’s not over:

If it’s not really over, the next move belongs to Yahoo. It will either find a way to return to competitive health or, after a few months have passed, it will go cap in hand to Steve Ballmer to discuss a much lower bid for its shares. That’s what I expect to happen.

I see it like this:

A rock – Yahoo! – a hard place

(Please note: I do not hold shares in Yahoo, Microsoft or any other IT company)