Last Updated: May 5, 2008: 1:06 PM EDT
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Microsoft ponders Plan B

Without Yahoo, Microsoft's Steve Ballmer has to figure out how to go it alone.

By Scott Moritz, writer

Without a Yahoo deal, Steve Ballmer faces an unrelenting competitor in Google.

(Fortune) -- Microsoft (MSFT, Fortune 500) showed its hand with the Yahoo (YHOO, Fortune 500) bid and then folded. Now the software giant has to prove that in its gambit against Google (GOOG, Fortune 500) there are some other cards to play.

Other deals that have been bandied about by the pundits - Facebook or AOL (owned by Fortune's parent, Time Warner (TWX, Fortune 500)) - are merely smaller pieces in a comprehensive online strategy.

Whatever Microsoft's Plan B, C or D ends up being, the company is back to A as in alone.

While there is a lot to be made of Yahoo's 15% stock plunge in the wake of the failed deal, and the acrimony it may have caused big investors who saw Microsoft as a rich enough exit, the tale of Microsoft's stock has been informative.

Instead of a rally that many companies enjoy when they walk away from costly deals, Microsoft shares saw just an initial 2% gain Monday. This is not exactly a vote of confidence. Clearly, some investors have found a little comfort in Ballmer's disciplined ability to abandon a pricey move, but the solace is temporary.

Microsoft still has faces an unrelenting Google on nearly all business fronts.

"A full recovery seems unlikely until Microsoft articulates a substantive, credible and new online strategy," wrote Bernstein analyst Jeff Lindsay in a research note referring to Microsoft's share value. "We believe simply returning to the original, pre-Yahoo strategy is likely insufficiently credible."

In a three-month campaign, Microsoft came within a few billion dollars of sealing a transformative deal that would have given the tech giant an online advertising operation second in size to arch rival Google.

Yahoo co-founder and CEO Jerry Yang was reportedly looking for a purchase price of $37 a share and Ballmer, having raised the original $31 a share bid to $33, walked away rather than go any higher.

The $46 billion acquisition of Yahoo was seen by Microsoft and industry analysts as the single best strategy to address the shortcomings of its overall Internet business. But in the end, Ballmer said: "The economics demanded by Yahoo do not make sense for us."

Pursuing a hostile takeover through a proxy battle wasn't in the cards for Microsoft, as Fortune's Adam Lashinsky pointed out Friday. Given the big holdings of Yahoo insiders and the typically non-voting retail shareholders, the math for a majority vote didn't work in Microsoft's favor. But some Wall Street observers say they expect a few discussions to be started between some of Yahoo's large institutional shareholders and Microsoft, in an attempt to bring the two parties back to the table.

"We think Microsoft still needs Yahoo to compete against Google and a deal still could potentially take place," wrote UBS analyst Ben Schachter in a research report Monday.

Analysts are quick to point to a similar deal earlier this year between business software giant Oracle (ORCL, Fortune 500) and rival BEA. After BEA rejected a $17 a share or $6.7 billion unsolicited offer in October, Oracle walked away. Then in January Oracle came back with a winning bid of $19.37 or $8.5 billion.

But one analyst shot down that idea, saying the two situations have little in common. Oracle simply saw BEA as way to pad revenue through maintenance contracts and to supplement its client list. In Yahoo, Microsoft saw a large-scale online strategy and a staff of developers that could help make a run at Google. And now that Yahoo is considering a partnership with Google, Microsoft may have to look elsewhere. To top of page

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