News has just come out that Microsoft is walking away from its bid for Yahoo! after raising its offer to $33 a share.

I'm not really surprised at this result. As much as he's like to think so Yahoo! isn't worth the $37 a share that Jerry Yang was holding out for, and I really don't think Microsoft wanted to go hostile considering the damage it would have done to the Yahoo! engineering teams it wanted. More than $33 a share, and Steve Ballmer would have been risking an awful lot of additional gearing that would have ended up diluting Microsoft's control of its own destiny.

So what's next? One option is to for Microsoft to take the same approach it did with Borland in the 90s - so recruiters in the Bay Area can probably look for a bumper year as Microsoft starts to cherry pick the talent it wants from Yahoo!'s engineering teams. That'll be considerably cheaper for Microsoft, though any results will take time to filter through its product pipeline. It took nearly 10 years for .NET to get to where it is today...

The other option is, I think, going to depend on how the Microsoft and Yahoo! stock prices behave over the next quarter or two. Monday should see a steep drop in Yahoo!'s price, and an equivalent (but not so dramatic) rise in Microsoft. The spectre of a hefty gearing has depressed Microsoft's stock, and the prospect of a payday has pushed Yahoo!'s up. If Yahoo! continues to trend down, its board is going to come under considerable pressure from institutional shareholders as to why it didn't take the $33 offer. Yahoo! will end having to approach various suitors, but there won't be a white knight until Microsoft comes in with a bid at around $28 (or possibly even lower) a share, which the Yahoo! board will be forced to accept.

Either way Microsoft gets the people and skills it wants for less than it was originally planning to pay, though the second option adds a few additional properties and the trauma of a merger...