# Monday, May 5, 2008

After Microsoft walked away from its takeover bid (or maybe this is just a tactic) Yahoo's share price lost most of its takeover premium this morning and is trading about 15-20% below its closing price on Friday. (But still above the $19 it was trading immediately before Microsoft's offer.

So what is next?

Yahoo will try to do something. They fought hard to stay independent, but at what cost? Shareholders have already started to sue and the market is punishing Yahoo today. They can outsource their search to Google (like they did when Google started) and focus on using Yahoo's web properties' traffic to make money. Slash jobs by outsourcing search and increase your valuation.  Then if Microsoft comes knocking again, they can argue a higher valuation. But Microsoft most likely won't come knocking if Yahoo outsources search. (This of course if the US Congress allows the Google deal.)

Microsoft may make a move on AOL. While not as strong as Yahoo, AOL will come with the traffic to build out the Live platform and Time Warner really wants to get rid of AOL. I am not so sure that this will work, but it is possible. AOL brings far less to the table than Yahoo. I can see a MySpace play but that does not really look like it will make money, ditto for Facebook. Social networking may have the eyeballs but not the ad dollars.

That brings us back to what happened this weekend. Yahoo and Microsoft have no good options in front of them. Yahoo can't stay independent without a major change. Microsoft needs to push its ad strategy out to more eyeballs and Live is not cutting it. I think they will both be back at the table in a few months.

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