So Microsoft has walked away from the Yahoo! deal, and I'm glad, but cautiously. The tech blogosphere has been busily going apeshit since the deal was announced, so I'm loath to repeat too much into the echo chamber, but I want to give a brief summary of the situation as I see it anyway.

Firstly, Ballmer made it clear that he walked away from the deal because Jerry Yang was going to make it too hard to do. This has two corollaries: first, some shareholders are going to feel like this was neglect of his fiduciary duties -- i.e., not in the best interests of the company -- and sue accordingly, especially if the stock nosedives on Monday (as is pretty widely expected). Secondly, it means that Ballmer would still like to do the deal, and a collapse of Yahoo!'s stock price would make it easier for Microsoft to come back later and try again.

In fact, many are speculating that this is just a hardball negotiating strategy on Ballmer's part. I'm not so sure. I think Ballmer may actually be done with Yahoo!, because he's worked out that he's not going to be able to get what he wants even if he does manage to buy the company. So what does Ballmer want? There's a few options:

• Technology: Yahoo still has a bunch of pretty nifty proprietary tech, but nothing that Microsoft couldn't reproduce given some time (and considerably less than $45 billion dollars).
• People: Bill Gates has publicly stated that engineering talent is what Microsoft wants out of the deal. If so, they would be sorely disappointed. If Microsoft can't hire them right now with the salaries they offer, then you have to assume that the talent it wants isn't working for Microsoft because it doesn't want to, and an acquisition would make that problem, if anything, worse.
• Advertising relationships (i.e. advertising market share): essentially, Microsoft would buy a bunch of customers. But again: Microsoft already has an online advertising arm. If people were willing to deal with Microsoft, they would already be doing so. Microsoft has no market share because businesses do not trust Microsoft as a partner, and again the acquisition wouldn't change anything.
• Customer relationships (i.e. search market share): Yahoo has between 20% and 30% market share and a brand that people recognize (unlike the colossal brand failure that is Live Search). Of all the possibilities, this is the one he'd be most likely to actually get, and $45 billion dollars (not counting various poison pills inserted by Jerry) is an awful lot of money to pay for market share.

Of course, if the stock tanks, then that market share could end up costing only $30 billion, at which point it begins to look more attractive. So if this walking away really is a negotiating tactic, look for the offer to come back within the next six months, possibly as quick as the next three. However, I don't think it's that likely -- I don't think coming back later would make this very troublesome acquisition any easier, and if they stock tanked it would shoot right back up when Microsoft came knocking again. So where does this leave the two companies?

Microsoft definitely comes off the worst. Ballmer looks impotent at best, incompetent at worst -- I mean, seriously? Your hard-dealing business-focused ass got faced down by nerdy, soft-spoken, all-around nice guy Jerry Yang? People are already claiming his career is in Jeopardy. And Microsoft as a company also takes a hit. Fake Steve jobs sums up nicely Microsoft's new position:

Nobody wants a big teetering giant stumbling through their market threatening to topple over and wipe out entire neighborhoods by accident. But that's what Microsoft has become -- the big stupid retarded giant lurching into the Valley, like King Kong with a lobotomy and a shotgun and a bottle of tequila, stomping around and beating its chest and then stumbling away, having wiped out most of the city.

As for Yahoo!, we come out battered but generally unscathed. Microsoft's failure to acquire us for $31 billion dollars because we wanted $40+ billion should permanently set the company's value somewhere between those two values, although in the absence of anybody else who could feasibly buy us the stock might plunge. I personally think that would be unjustified: a modest fall in stock price would put us back at the same 40 P/E ratio as Google, which is the only company reasonably comparable to what we do.

Who wins? In a word, Google. This highly public drama has been a huge distraction for its two biggest competitors and will continue to be for some time. Oh, and I, personally, am much happier.