Apparently, Microsoft is giving up in its pursuit of Yahoo!. (that exclamation mark always makes for some awkward punctuation). Officially, the reason is that:

After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal

This is a little odd, because Microsoft had made no secret of its plans to take the bid hostile if it were rejected, and had gone so far as to select board members for a proxy fight. Backing out now because of what Yahoo! was “demanding” therefore seems a bit suspect. It appears much more likely that Microsoft finally joined the board of Yahoo! and most of the rest of the opinionated world in recognizing that the deal was a bad idea. But it’s taken a surprising amount of humility from Steve Ballmer (not normally the most humble of people) to back out at this point, even if Microsoft is wrapping that humility in another explanation.

There has been speculation about what Microsoft might do if its bid fell through for whatever reason, with one of the most interesting alternatives being that Microsoft would go out and buy a slew of companies with the money it would have spent on Yahoo! I’m not sure it makes sense to spend a ton of money just because it had planned to, but it’s certainly possible that Microsoft could use some of its substantial war-chest to make some more purchases.

However, what Microsoft really needs at this point more than anything else (even and perhaps especially as it acquires more companies) is a change in culture, to move more quickly to embrace new business models, and to begin to make the shift from the offline to the online world in its software business. It needs to learn a few tricks from Yahoo!, Google and others in these areas. Otherwise, the risk is that it continues to fall short in everything it does, doing just enough to be a participant in markets without ever leading them. It’s doubtful that this change will happen anytime soon, but perhaps the Yahoo! failure might turn out to be a cause for re-evaluation at Microsoft.

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