News broke late tonight (Saturday) that Steve Ballmer (CEO) from Microsoft sent a letter to Jerry Yang (CEO) of Yahoo saying the deal is off.

OMG - the deal is off. What about the hostile takeover Ballmer guaranteed if Yang would NOT agree to the proposed Microsoft Acquisition?

Let me remind Jerry - Yahoo (YHOO) was trading at about $19 when Steve came in and offered $31 per share.

I can’t tell you how upset I was that I didn’t buy a few thousand shares of YHOO before the very aggressive MSFT offer was made public. No worries Jerry and Steve - I got in on GOOG at the IPO price…sold it and then bought in again and again and sold all the way from $125 to $600 (BTW - sold what I had left around $600 and never looked back).

OK. YHOO at $19. Ballmer makes bid with a price tag of $31. YHOO trumpets to nearly $30.

Think about this for a second.

YHOO responded as if the rise in share price (NOTE: YHOO climbed over 50% in value the next trading day) had something to do with the actual quality of the YHOO business. Guess what - it didn’t!

Now what.

Ballmer has officially pulled the deal from the table.

Yahoooooooooooooooooooo - I’m glad I dind’t buy the stock because Monday morning is not going to be pretty.

My heart goes out to my friends at Yahoo, including employees and shareholders.

What’s next?

Will Yahoo as a company rebound?

Absolutely not. At least not alone.

Can Yahoo realistically compete with Google in the search space? No.

Can Microsoft realistically compete with Google in the search space? No.

Can the combined MSFT / YHOO compete with Google? Hmmmmmmmmmmmmm. Not likely.

So what happens next?

My guess is that Google waits for Yahoo’s stock price to go into the teens and they make their own bid for YHOO….

Then, MSFT comes back in and makes another offer.

GOOG and MSFT battle it out and MSFT ends up the winner at $38 per share.

Note that if you are following the details of the story in the popular media YHOO would have done the deal already if MSFT would have ponied up $37.

If my theory is correct Yang will be celebrated as a hero to YHOO shareholders.

If my theory is incorrect Yang is absolutely screwed.

UPDATE: Michael Arrington over at TechCrunch is predicting a “Black Monday” for YHOO tomorrow referring to the likelihood (see above) that YHOO is going to tank when the markets open tomorrow. Another interesting part of his post was that he suggests YHOO may be moving as quickly as possible to make an announcement about a pay-per-click syndication deal (i.e. YHOO syndicate GOOG) with GOOG.

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