Microsoft should walk away from Yahoo

It's deadline day for Yahoo. Three weeks ago Microsoft CEO Steve Ballmer told Yahoo that it needs to negotiate about the software giant's $31 a share offer. Since Ballmer's ultimatum there has been a lot of bluster, but little else. And it's quite possible that this weekend will be uneventful with neither party doing anything. How should Microsoft play this? It should walk away.

Microsoft CFO Christopher Liddell said on Thursday that the company will consider its options in the event that doesn't comply. Yahoo has no plans of talking to Microsoft unless it raises its bid. The Wall Street Journal reports that the two companies have been talking, but there's nothing concrete that would point to a deal by Saturday's deadline.

Good ideas for Microsoft abound (Techmeme). Kara Swisher notes that Microsoft should take its $44.6 billion and buy up a bunch of Web 2.0 companies including Facebook and LinkedIn. Henry Blodget puts the odds of Microsoft walking away at 60 percent. Those odds would have been shocking a few days ago--at least until Microsoft reported a mixed quarter.

Also see: Does Microsoft CEO Steve Ballmer need an intervention?

So why should Microsoft walk?

• If Microsoft loves Yahoo it should set it free (and watch its market cap tank). If Microsoft really wants to show Yahoo that its $31 a share offer is fair it should let Jerry Yang, who has been steadfast in his belief that his company is worth more, live without the bid for awhile. Microsoft could back off, see how things shake out and bid again later.
• Opportunity costs. Microsoft could do other things with its money. There's Salesforce.com, Facebook and a bevy of smaller tuck-in acquisitions that would make more sense.
• The risks aren't worth it. Microsoft will face regulatory hurdles and disgruntled employees on both sides of the aisle. Meanwhile, Google will continue to run circles around both companies. Is it worth the effort?
• Microsoft needs to squeeze Yahoo shareholders too. If Microsoft really wants to go hostile it should do a walk-away first to loosen up any Yahoo shareholders who think they can get $35 a share. Yahoo shareholders will be much more receptive to Microsoft's bid after a little market cap haircut. Nothing annoys shareholders more than watching cash walk away.
• Microsoft has more pressing issues. Sure online advertising is a great business. But the software giant's quarter wasn't all that hot. Perhaps Microsoft should focus on its client business, which wasn't up to snuff this quarter.