Takeaways from busted Microsoft-Yahoo deal

What's Yahoo's next step?
The company is now under enormous pressure to find an alternative deal, or deals, that can rev up its stock. It's considering a search-advertising outsourcing partnership with Google to generate more revenue. The two companies launched a trial partnership a few weeks ago that is said to be going well. Look for an announcement on this pact.

Yahoo also might still be considering a merger with AOL. Yahoo also had discussions with News Corp. to acquire its social networking behemoth MySpace. But later, News Corp. switched sides and considered joining Microsoft's bid for Yahoo, so a deal with News Corp. seems unlikely now.

Will Microsoft come back at Yahoo later?
If Yahoo's stock tumbles, industry observers say the acquisition door could open again, perhaps later this year. Microsoft will "watch what happens to  and wait for  to falter," says Edward Deibert, a director at law firm Howard Rice Nemerovski Canady Falk & Rabkin. "If Yahoo is unable to deliver, Microsoft could take another stab at a [lower] price."

What will happen to Ballmer and Yang?
It's unclear whether Ballmer will be seen as a strategic genius or the guy who couldn't get the deal done. Chowdry says Ballmer only went after Yahoo and put a sky-high price on the company to make sure no other company acquired it. And while Ballmer has done lots of deals, he's never done a deal as big as Yahoo.  It would have been at least seven times larger than Microsoft's biggest deal to date — the $6 billion buyout of digital marketing firm aQuantive last year.

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Yang could be ousted if he doesn't find a way to bump up Yahoo's stock in a hurry. Industry watchers are scratching their heads about why he wanted so much more than what Microsoft offered.

What is Silicon Valley's reaction?
"I think people are pretty shocked and surprised" that a deal didn't happen, says Keith Rabois, vice president of strategy and business development at Slide, a Web application developer. "The Internet trendsetters all think of  Yahoo as past its prime" and expected it to accept a good offer.

Jay Bhatti, co-founder of search engine Spock.com, says start-ups in the Valley are generally relieved that the deal didn't happen because two major acquirers are still intact. The deal would have consumed both Microsoft and Yahoo for a year while they integrated their operations and would have left the Valley with just one major acquirer where once there were two. Now, "Ballmer and Microsoft will want to do more small acquisitions," Bhatti says. "They might spend $10 billion buying 20 small start-ups. I think the Valley's pretty happy about that."

Rabois notes that Microsoft's image in the Valley has improved as well. "Microsoft had a bad reputation among Internet elitists mostly because of the browser wars" in 2000 when Microsoft put Netscape out of business, he says. Now, Microsoft is considered a good business partner. Slide, for instance, has an advertising partnership with Microsoft. The software titan's most high-profile partnership is with Facebook, in which it owns a small equity stake.

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