So if you are a shareholder of Yahoo!, how are you feeling about Jerry Yang right now? This is an interesting tidbit from the NYT:

Reactions inside Yahoo are likely to be mixed. Several senior executives favored selling to Microsoft and said in recent days that they were hoping to see a deal happen. Yet other executives were high-fiving each other for defeating Microsoft’s bid, people close to the company said.

While its stock may fall on Monday, Yahoo's management was encouraged by discussions with its largest investors in which they urged management to not accept $33 a share, these people said. For Mr. Yang, Microsoft’s withdrawal is considered a “personal victory,” according to one person who spoke with him.

Hmm. Not so fast. If Yahoo's largest stockholders were opposed to a Microsoft acquisition, a hostile deal would be extremely difficult, but some reports suggest that Yahoo's largest investors were closer to being happy with a Microsoft deal than you might think. From C-Net:

With Microsoft's withdrawal of its increased Yahoo bid on Saturday, the Internet search pioneer's two largest institutional investors are fuming, according to a source familiar with their thinking.

The two investors were willing to accept an offer of $34 a share, the source noted. Microsoft was offering "Yahoo overplayed its hand," said the source." If Yahoo's two largest investors are willing to take $34 and Microsoft is willing to give $33, it's a lot closer than Yahoo's $37 (a share)."

The other big investor that people have been focusing on is Legg Mason, which announced last month that it would support Yahoo's management if Microsoft lowered the price in a hostile deal. But, "If Microsoft raises the offer, the pressure shifts very quickly to Yahoo to negotiate.... To me, bumping the number up a buck, that would have a big impact psychologically on shareholders." Hmm.

And what do you make of Microsoft's press release?

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer. 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," said Ballmer.

This deal has never been about Yahoo's demands. Perhaps Steve Ballmer learned something in the talks with Jerry Yang that changed his mind? This is from the letter Ballmer wrote to Yang:

I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.

The letter goes on to suggest that Microsoft backed away from a hostile bid because of Yahoo's expressed intention to "take steps that would make Yahoo! undesirable as an acquisition for Microsoft." What steps? Allying itself with Google!

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.

So did Yang's version of the scorched-earth defense work? Or would Microsoft return if the market chastens Yang? Note the first sentence of the press release:

We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo! and the market as a whole.

Apparently, Microsoft's move is not merely a negotiating tactic, but don't count Microsoft out just yet. The ball is in Jerry Yang's court.

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