Of this deal there are two interesting aspects; analysts are pretty much clueless, and Google really stepped into it.

“Microsoft is playing hardball, but I think a deal will still happen,” said Piper Jaffray analyst Gene Munster, “It’s like a couple trying to break up — they say they are done, but you know they will get back together.”

How do you know? Gee last Friday Yahoo stock went up because people thought the deal would happen and look where we are. In fact just as the market closed I glanced at 22.50 PUT options and I told my wife, you know I think I will buy some options on Monday.

Disclosure: Of all my recommendations and discussions only one idea has royally blown up, namely GPS. Though now GPS is recovering and I don’t think it will be an overall looser. You are just going to need time. Otherwise my portfolio and recommendations have done pretty well.

This discussion reminds of the endless viewpoints of analysts saying, “oh the ECB will cut rates because they have to.” And yet Trichet repeatedly said, “read my lips NO CUT.” Yet analysts kept on saying, “there will be a rate cut” and yet there is none. This is the same situation with Microsoft. Microsoft will only do the Yahoo deal if it can do the deal on good terms. Otherwise Microsoft will walk!

“This is far from over,” Allen said, noting that Ballmer is widely known as “a very sore loser.”

I know Microsoft extremely well, having worked with them as one of the first beta testers 1988, an external evangelist (Microsoft Regional Director) 1995-1996, against them around 2000 to 2003 with Open Source and Java, and now with them again 2003-. In all that time I have learned Microsoft is strategical. They never cut their bridges to me, but we have since 2000 kept our distances.

The problem with Jerry Yang of Yahoo, and Eric Schmidt of Google is that they have too much hatred of Microsoft. There was a time when I had a hatred of Microsoft, Apple, and other companies. But I buried those emotions and moved on. The leaders of Yahoo and Google have not moved on and that is going to cost them. Maybe even shareholder lawsuits for Jerry Yang.

Google meddled and that was a bad idea. Yes Google is directly affected by this deal, but they should have kept their distance since Google is a reason mentioned by Microsoft on why they walked.

Ballmer cited Yahoo’s Google plans as one reason Microsoft was walking away rather than mounting a hostile offer.

As a techy I love Google. Great company, great technology, great environment. As a techy Google represents what technology is and should be about. As an investor and market analyst Google’s Schmidt should have been smarter.

Microsoft has complained that Yahoo tie-up with Google would amount to the market leader paying the second-largest player to step aside. Microsoft could file a related complaint with the Department of Justice, which is already scrutinizing the deal.

He should have said the following to Yang:

“You know Jerry, I agree with your plight, and that we should make a deal. But here is the thing. Google is a major company with a major marketshare and this could have funny ramifications. So let’s do the deal after you fend off Microsoft, ok?”

This meddling has the ramification that the government might take a very deep look at Google and that plays into Microsoft’s hands.

A Microsoftie once said to me the way they compete is to take out the competitors’ cash stream. Once that is gone the competitor is left with no cash flow and struggling. I think the initial idea was to merge with Yahoo to accelerate their competitiveness with Google, but Eric Schmidt with his meddling gave Microsoft a golden opportunity without paying a single dime. With the government breathing down the neck of Google there might be investigations and rulings. All of this will drag down Google and throw them off their game in the area that is most important for them. I am almost wondering if Ballmer is not laughing his head off with how this situation is turning out.

What happens now?

I think Microsoft is going to stick to their guns and wait. I think they will wait until the Yahoo shareholder meeting starts. I think Microsoft wants to see how much of a lynching there may or may not be.

If a deal does not happen an idea I heard was Microsoft acquiring AOL from Time Warner or my own variation what if Rupert Murdoch somehow fits in? Murdoch has many pieces of prime real estate that I am sure he would like managed. For Microsoft both of these deals are cheaper and might prove better for them in the long run.

How will the Yahoo stock do on Monday? I was at first thinking a complete collapse, but now I think otherwise. I think Yahoo will drop with an EOD of 25 because people like these analysts are saying, “hold firm don’t worry this deal will happen.” Though sometimes I wonder if these analysts are not saying this so that they can move their positions out before the herd.

Then depending on what Microsoft does there will be a slow and painful grind to 13-15 USD. I believe this level will be reached because shareholders will loose complete faith in Yahoo. Remember people buy shares for one of the four reasons:

  1. Buyout
  2. Dividends
  3. Growth
  4. Share buybacks

Yahoo has none of these reasons so why hold the stock? And Yahoo has already shown that they don’t want to sell at reasonable levels.

What about Google? I think they just created a glass ceiling on their stock by their meddling. And I wonder if this will not be the first time that Google stumbles. What bothers me the most with Google is that even a merger with Yahoo and Microsoft would have worked for them. They would have no problems with anti-trust since Microsoft is the bullseye of anti-trust. As they say sometimes it is best to let sleeping dogs sleep.