The proposed purchase of Yahoo! (NASDAQ:YHOO) by Microsoft (NASDAQ:MSFT) has been dead for weeks. However, in the same spirit of Haitian UFOs, satanic Procter & Gamble executives, and the killer combo of Coke and Pop Rocks, urban legends have been keeping Microhoo alive.

Did you miss the tabloid headlines proclaiming to have spotted Microhoo chowing down with Elvis  at a greasy spoon? Carl Icahn was probably trying to shield his eyes. He'd been playing negotiator by throwing out a $34.75-per-share deal price.

Icahn is human. He makes the occasional bad deal. However, loading up on Yahoo! shares at higher prices, under the assumption that Microsoft was bluffing about bolting, makes him look silly for not folding his weak hand earlier.

In a press release issued at high noon in Silicon Valley yesterday, Yahoo! provided the obituary.

"Discussions with Microsoft regarding a potential transaction -- whether for an acquisition of all of Yahoo! or a partial acquisition -- have concluded," the release reads.

Microsoft disagrees, on the "partial acquisition" point.

"As stated on May 3rd and reiterated on May 18th Microsoft was not interested in rebidding for all of Yahoo!," Microsoft noted in its own announcement. "Our alternative transaction remains available for discussion."

In other words, Microsoft may have walked away from buying Yahoo! completely, but now Yahoo! is walking away from selling its search-engine business piecemeal.

The world no longer revolves around Yahoo!
Microsoft had killed its plans several weeks ago to buy all of Yahoo!, but it left the door open by angling to buy Yahoo!'s search business. Now it appears that Plan B is a dead end, too.

Three hours after Yahoo! made its proclamation, it announced an ad deal with Google (NASDAQ:GOOG), in which it will outsource its paid-search business in a move that will enhance its revenue generation -- although at the expense of conceding defeat to its dwindling fleet of paid-search sponsors.

Yahoo! sees the deal adding as much as $800 million in annual revenue, with as much as $250 million to $450 million in incremental operating cash flow.

It's a smart financial move, but it moves Yahoo! another rung lower on the ladder of relevance. Yahoo! has the option of running its own ads, but why should it? Once investors taste what's possible under Google, they'll wonder why Yahoo! didn't break the emergency glass sooner.  

Yahoo! has tapped its balance sheet in acquiring display-advertising upstarts, an area that isn't as lucrative as paid search but is well suited for Yahoo!'s high volume of low-quality page views. Now it has the master of monetization giving Yahoo! its AdSense extreme makeover.

Yahoo! itself isn't a low-quality company, but the traffic generated for its free email and its news portals is a weak sell for advertisers looking for marketable leads.

Kudos to Microsoft
Yahoo! investors may have been disgusted with the stock's 10% plunge yesterday, but Microsoft shareholders were relieved and sent their shares 4% higher on the news. I don't know why it took Microsoft this long to formally walk away from the talks that were weighing it down.

I'll confess that I never understood why Microsoft would overpay for Yahoo! the way it did with its offer, originally valued at $31 a share. I was even more mystified by Microsoft's temporary move to up the bid to $33 before recoiling.

To be taken seriously as a negotiator in the future, Microsoft doesn't need its targets to assume that it will always come back with a sweetened offer, even when it's the only interested party.

Meanwhile, I featured Yahoo! in the original "Throw This Stock Away" column two weeks ago. I observed that the near-term upside was limited while the downside was substantial, given Yahoo!'s lofty valuation and lethargic growth.

Reasons to be fearful
"The online advertising industry is projected to grow from $40 billion in 2007 to approximately $75 billion in 2010, and the company believes it has the right assets, strategic plan, Board of Directors, and management team to capitalize on this growth opportunity," reads Yahoo!'s announcement.

This statement would be credible if Yahoo! were keeping up with the market, but it isn't. Giants such as Google and smaller players such as IAC's (NASDAQ:IACI) have been eating up Yahoo!'s fading market share. If the company's "assets, strategic plan, Board of Directors, and management team" weren't good enough to keep pace with the online-advertising boom over the past three years, why should the next three be different?

Yahoo! isn't worthless. The company still has a cash-rich balance sheet and investments in Asian juggernauts Alibaba, Yahoo! Japan, and Gmarket (NASDAQ:GMKT), which were worth about $10 a share earlier this year. 

Hooking up with Google should also help maximize the monetization on Yahoo! and fatten margins as the company reduces its own paid-search marketing team while cashing in on Google's deeper bench of targeted text ads.

But keep in mind that Yahoo! was also trading in the high teens when Microsoft stepped in earlier this year. Now that Microsoft seems out of the picture, at least until it can try again next January at a lower price, Yahoo! will have to earn its keep. Even at yesterday's close of $23.52, Yahoo! is still expensive relative to the earnings valuations of its faster-growing rivals.

The end of Microhoo won't make this summer's annual shareholder meeting at Yahoo! any less interesting or its board members any less vulnerable.

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