How will Yahoo shares fare on Monday?

By Charley Blaine and Elizabeth Strott

Now that Microsoft (MSFT, news, msgs) has decided to withdraw a $47.5 billion offer for Internet-services company Yahoo (YHOO, news, msgs) the immediate question is what happens to Yahoo's shares.

Right now, the consensus is lower. What was not known Sunday was how low.

The talk suggested Yahoo shares might fall into the low-to-mid $20 range. Paul Kedrosky suggested on his Infectious Greed blog Sunday that a price in that range will reflect a belief that talks between Microsoft and Yahoo could start again.

Analyst Laura Martin of Soleil Securities in New York told Bloomberg News Saturday she thought the stock could open down $8 or $28% from Friday's closing price of $28.67. (The stock moved up an additional 3.6% to $29.70 in after-hours trading.)

Venture capitalist Fred Wilson thinks Yahoo will close at $26.

A price gap and more

A Microsoft statement said Saturday that the software giant was willing to pay $33 a share for the company, $2 a share more than originally offered. But Yahoo, which first demanded $38 a share, refused to budge from a reduced demand for $37 a share or roughly $53 billion. (Microsoft is the publisher of MSN Money.)

"After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," Microsoft CEO Steve Ballmer said in a statement.

The decision came after a meeting in Seattle Saturday between Ballmer, Yahoo CEO and co-founder Jerry Yang and Yahoo co-founder David Filo, The New York Times said. Also attending was Kevin Johnson, who heads Microsoft's online business.

Ballmer and Yang had also met on Wednesday at the office of Yahoo's law firm, The Wall Street Journal said.

At the end of Saturday's meeting, where Yang and Filo insisted on $37, The Journal said, they returned to California expecting a counter-offer -- which didn't materialize.

In a letter to Yang, Ballmer said, "By failing to reach an agreement with us, you and your stockholders have left significant value on the table. But clearly a deal is not to be."

Ballmer said Microsoft walked away in part because the price was too high. Plus, moves Yahoo made to outsource advertising to Internet search giant Google (GOOG, news, msgs) made a deal increasingly unattractive.

The moves would undermine Yahoo's own strategies, cede pricing power for Internet advertising to Google, cause a drain of engineering talent and create enormous regulatory and legal problems, he said.

• Poll: What's your opinion about Microsoft and Yahoo?

Separately, Ballmer sent a letter to Microsoft employees saying, "Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo."

In a statement issued late Saturday, Yahoo said that its board and 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.

"Yahoo! is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market."

But Yahoo may face some major shareholder wrath on Monday because so many shareholders are angry. Analyst Martin's reaction to Yahoo's intransigence was "Unbelievable." The comments on the Yahoo message boards for Yahoo shares were mostly anger.

The decision caps a three-month effort by Microsoft to acquire Yahoo. Microsoft was hoping the acquisition would produce a stronger competitor to Google.

But Yahoo resisted the offer, originally valued at $44.6 billion, as too low and tried to attract other bidders.

The two sides were reportedly holding intense talks on Friday, with Microsoft making its $33-a-share offer, and there were hopes that a deal would be cut this weekend.

The surprise of Ballmer's threats to walk away

Hints in the past week or so that Microsoft might abandon its offer had sent the shares to as low as $25.91 on Monday. For weeks, Ballmer had held firm to the original offer, insisting it was fair in light of Yahoo's eroding profits during the past two years.

After the Yahoo bid was announced, Microsoft shares fell nearly 18% from their Jan. 31 close of $32.60 to a low of $26.87 on March 3.

The shares recovered to $32.10, but disappointment with the company's third-quarter earnings report knocked the stock down again in late April. It closed Friday at $29.24.

Microsoft's board reportedly met this week to consider raising the bid to $33 per share, which would translate to about $47.5 billion, to Yahoo Friday. Several of Yahoo's major shareholders were reportedly looking to get at least $35 per share and possibly as much as $37, a price that have would valued Yahoo at about $53 billion.

The deal would have given Microsoft a stronger foothold in its battle with Internet search leader Google, which is rapidly expanding into the software maker’s own turf with new Web-based applications.

Demands for a higher price

Yahoo executives have repeatedly said the company was not averse to a deal with Microsoft at a higher price.

But in a sign of its reluctance, Yahoo also has tried to strike a deal with Time Warner's (TWX, news, msgs) AOL division and has tested a search advertising partnership with Google. (Henry Blodget, writing on Silicon Valley Insider Saturday, wrote that Yahoo reportedly may offer $10 billion to buy AOL from Time-Warner, adding "Microsoft may have something to say about that.")

Still, in declining Microsoft's offer, Yahoo's managers and board are making a huge bet that the company can survive and prosper as a stand-alone company.

Microsoft announced its $31-a-share offer on Feb. 1. The offer was a 62% premium over Yahoo's Jan. 31 closing price of $19.18. Yahoo had been struggling for some time against competition from Google, Microsoft and AOL. The stock had fallen nearly 56% from a three-year high of $43.42 on Jan. 6, 2006.

Yahoo immediately declared the offer was too low and looked around for possible merger partners, including Time Warner, News Corp. (NWS, news, msgs) and Google. Google has not made an offer because of probable antitrust challenges from the Justice Department and the European Union.

Microsoft and other competitors would also probably challenge a Yahoo merger with Google.

Microsoft has spent years and billions of dollars trying to build its own online business. Yet it has steadily lost ground to Google, The Times noted, and has failed to gain significant momentum with advertisers.

But, if Yahoo's shares fall significantly, the company will be under intense pressure to act and may choose to resume negotiations. It could also start a big stock buyback to support the stock price, The New York Times suggested Sunday. Yahoo had $2.6 billion in cash and short-term investments at the end of the first quarter and only $583 million of long-term debt.

Earlier this year, under intense shareholder pressure, BEA Systems agreed to a takeover by Oracle (ORCL, news, msgs) soon after Oracle dropped its unsolicited offer for BEA.

Microsoft couldn't make a good enough return on the purchase if it would have paid more than $35, analyst Charles Di Bona at Sanford C. Bernstein told Bloomberg. "It was to their credit that they weren't just chasing this deal at all costs." At the same time, he added, Microsoft needs "really come out and articulate what their Internet strategy now looks like.''