At the time I wrote yesterday’s entry, I hadn’t yet seen the letter from Steve Ballmer to Jerry Yang about the reasons for calling off the deal. It does provide some more detail about exactly what Yahoo! was doing that was preventing the merger from going forward:

Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.

We regard with particular concern your apparent planning to respond to a “hostile” bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number
of reasons[.]

In essence, it was Yahoo!’s pursuit of the search relationship with Google over the last several weeks that put a real spanner in the works. To Microsoft, the whole point of the deal was putting up a stronger competitor to Google in the search marketplace, so cozying up to Google was the last thing Yahoo! should have been doing. So it appears that Yang’s decision to go down this route actually served two purposes – it put Microsoft off, but it also provided a way to improve the financials in Yahoo!’s search business, at least in the short term.

Of course, if you’re a Yahoo! shareholder, you would probably say that you’d have taken Microsoft’s 70% premium over any short-term boost in results and the mere possibility of an improvement in the share price over the medium to long term. Even though Microsoft won’t now pursue a proxy fight to replace the board, shareholders may decide that they want someone running the company who will put their interests first. Employees, on the other hand, and customers, will probably breathe a huge sigh of relief. But Yahoo! still has a long way to go to reassure either set of people.

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