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Microhoo bid raised aloft; Google-Yahoo Kool-Aid quaffed. “No Mas” cried Ballmer’s Microsoft.

Yahoo drank the Google paid search Kool-Aid to fight off Microsoft, leading the Redmond giant to retract its higher bid to acquire the Sunnyvale search engine. Microsoft reportedly offered $33 a share, and Yahoo held fast at $37 a share. That was too rich for Steve Ballmer’s blood. The prospect of Yahoo outsourcing its paid search to Google was also too much for Ballmer to stomach.

So Microsoft walked. In a letter to Jerry Yang (full text below), Steve Ballmer cited Yahoo’s intention to outsource search as the primary reason he decided to scotch the deal.

Of course that doesn’t mean enraged Yahoo! shareholders won’t sue Yahoo.

Ballmer wrote, “I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!.”

Here’s why, according to Microsoft’s business logic:

Advertisers would use Google rather than Yahoo! Panama to manage paid search, fragmenting not only PPC but display advertising and the Yahoo! advertising ecosystem.
Yahoo then wouldn’t be able to retain talented engineers working on advertising systems – engineers whom Ballmer considers a key aspect of Yahoo’s attractiveness.

The decision would also create a morass of regulatory and legal problems that no acquirer – especially Microsoft – would want to slog through. Ballmer believes search market share of the combined Yahooo-Google deal would reduce competition and advertiser choice.

Ballmer took the argument one step further, stating the deal would “effectively enable Google to set the prices for key search terms on both their and (Yahoo!) search platforms and, in the process, raise prices charged to advertisers on Yahoo.

While it would be hard to prove a keyword-auction would enable Google or any search engine to “set prices,” the deal would increase keyword prices based on Google’s ability to monetize inventory more efficiently.

Yahoo responded by promising (again) to maximize shareholder value and pursue strategic opportunities. Yahoo still maintains Microsoft undervalued the company.

Yahoo! banged the drum (again) about:

“– a refined strategic focus to drive enhanced volume and yield;

– reorganized to focus its efforts on its most promising products and services;

– invested in innovations designed to revolutionize display advertising and facilitate closing the competitive gap in search; and

– enhanced expense and resource management to support improved profitability.”

As Jerry Seinfeld might have said, “Yadda, Yadda, Yadda, Yahoo.”

Be prepared Monday for Yahoo shares to plummet back to earth. (Full text of Steve Ballmer’s statement after the jump.)

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