Microsoft has been radio silent since Yahoo's doomsday clock struck midnight last weekend. No chariots-cum-pumpkins, no big bombs—just dead air.
Even employees say they're in the dark as to the company's next move. So as its stock slowly loses altitude, C.F.O. Chris Liddell offered the only clue available in an conference call with Microsoft employees late last week.
Liddell wouldn't make clear "the Yahoo situation." In the face of such uncertainty, the wheels of analysis spin furiously. One of the better insights came from Citigroup analyst Mark Mahaney, who handicapped the outcomes of the Microsoft-Yahoo war.
Mahaney reckons there's a 45 percent chance Yahoo sells out at a higher offer; a 40 percent chance Microsoft goes hostile; a 10 percent chance Microsoft walks away; and a 5 percent chance they both agree to the current price.
Taking each of those options in turn, it's possible to at least handicap some winners and losers as this particular battle in the war for the web plays out.
Scenario: The higher offer
What happens next: The classic prisoner's dilemma: If Yahoo said early on it would take a higher bid, Microsoft would have paid it. If Microsoft had upped the bid early on, Yahoo would have taken it. Yet neither did so, because of two decades of Silicon Valley history when Microsoft sucked the lifeblood of many start-ups.
Today's Microsoft may be less vampiric, but the memories linger. It's like other reparations: Silicon Valley demands it be compensated via a Yahoo premium, but Microsoft's current shareholders don't understand why they must pay from their pockets for others' past sins.
Winner: Steve ("Give It Up to Me!") Ballmer. Yahoo, across the board.
Loser: Microsoft shareholders.
Wild card: Microsoft deliberately offered mediocre earnings knowing its stock would drift down—and with it, its bid for Yahoo. (Microsoft initially offered half cash and half stock for Yahoo, worth $44.5 billion in February but worth only $40.9 billion today.) If Microsoft offers all cash, it effectively pays a 10 percent premium to the current value without raising its initial bid.
Scenario: The hostile takeover
What happens next: With Saturday's deadline past, Microsoft has to be talking with key Yahoo shareholders behind the scenes. Last week's threat by C.E.O. Steve Ballmer that Microsoft may simply walk away was a bluff intended to weaken their resolve.
One shareholder, Capital Group, doubled its stake in Yahoo in the first quarter. If Capital bought those new shares after Microsoft made its offer, it may be in its financial interest to talk with Microsoft.
The catch here is the poison pill Yahoo created seven years ago. Once an aggressor owns more than 15 percent of Yahoo, the board can "make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors." That means the board can issue 10 million new shares overnight, and existing investors can also buy new shares.
So Microsoft's ultimate tactic is a proxy fight—it can push an alternate board; all of Yahoo's directors are up for reelection this year.
Yahoo deserves a board that can help it find a way out of its slump. Some current board members, hailing from Skyrider and Northwest Airlines, seem irrelevant. But those pitched by Microsoft, with experience at Grey Global Group and Adelphia, are arguably worse.
So while hostile in name, this effort will remain tame. Microsoft remains as incapable of a knockout punch as it has been all along. And that means a long and costly proxy battle, with at best a Pyrrhic victory for Microsoft. And the slump in Microsoft's and Yahoo's stocks will likely continue.
Winners: No one, really.
Losers: Everyone else.
Wild card: Big Yahoo investors like Capital Group decide they're tired, and take Microsoft's offer.
Scenario: Microsoft walks away
What happens next: Yahoo's stock drops back below $20, and Microsoft's rallies above $30.
Then Yahoo turns its spin machine away from Microsoft and toward future growth. Yahoo has launched a few initiatives—improving its algorithms, opening its search to developers—that could potentially have a real impact. Its stock, usually volatile, could rise above $31 if it does everything right.
Microsoft has its own options. It could buy the AOL business that Time Warner is eager to sell. It could buy or exchange stakes with News Corp., taking an interest in MySpace and Fox Interactive Media. It could buy Ask.com if Barry Diller finally spins it off, or a neglected online-ad player like ValueClick.
Winners: Microsoft shareholders.
Losers: Yahoo shareholders, at least for several months.
Wild card: Microsoft bolts just so Yahoo's stock can plunge, then it walks back in a few months with a lower offer. An intriguing bet, but if Yahoo does turn around this year, Microsoft would regret taking such a risk.
Scenario: Microsoft sticks to its half-stock, half-cash bid
What happens next: Assuming Microsoft doesn't pay all cash, this isn't likely unless Yahoo's stock falls further.
Winners: Microsoft workers hoping for the cash Microsoft would need to pay for Yahoo.
Losers: Anyone who bought Yahoo on Microsoft's initial offer.
Wildcard: Yahoo's prospects grow unexpectedly dimmer in the next few months.
