Microsoft says bye-bye to Yahoo! bid

So... the game is over. After a three month courtship that never really moved beyond a one-way attraction Microsoft has withdrawn its offer. The bid had been raised from an initial $31 per share, up to $33 per share - adding nearly $5 billion to the offer value. The final break up of the deal came as something of a surprise as the gaps between the two sides had seemed to be narrowing over the past few days.

In the short term this is going to give the Yahoo executives a sense of short term relief, seeing off the bid without having to enter into a force relationship with another bidder that would only have been less-bad rather than a good option for the company. There is likely to be an immediate decline in Yahoo share price, closer to the price-bid level, although the strong results last quarter should make the decline less precipitous. It is unlikely to make Yahoo a bargain takeover target, as the minimum price levels have now been set. If Yahoo directors were to take a lower price than the Microsoft transaction out on the table then there would be severe trouble for the directors. Yahoo will, over the next few months, need to lay out the plans that will deliver the much promised better returns than were on offer from the Microsoft deal.

Deepening the relationship with Google may be part of that plan but this is where Yahoo needs to take care. The advertising relationship with Google may well have been attractive when Microsoft were chasing Yahoo, as something akin to a poison-pill clause, they raise serious questions for an independent Yahoo. The basic question is "What does Yahoo want to be?" and this now needs a clear and unequivocal answer.

What does this mean for Microsoft now ? There is something of loss of face but it would have been a greater loss of face if Microsoft had paid over the odds for Yahoo. The Yahoo customer base in the established Western markets would have provided a valuable additional customer base and distribution potential for Microsoft cloud-based offerings that are emerging and that will continue to emerge at an ever-increasing rate - with Yahoo engineering capabilities helping the acceleration of cloud services coming to market.

For me one of the most important implications is in the Asian markets. Yahoo would have increased the presence of Microsoft in China and other parts of the rapidly emerging Internet markets in Asia. China is the number one Internet use base globally, ahead of the USA in terms of numbers, although not in sheer dollar terms - at least not yet. Microsoft will need to make a number of moves to bolster its operations in these markets. This cannot just be through an increase in the size and scale of existing Microsoft operations in its target countries.

Asian acquisitions need to play an urgent role in the new Asian strategy for Microsoft, and China, Japan, and Korea would be fruitful places for the head shoppers at Microsoft.