Microsoft is walking away. The right thing to do in my opinion.

Could Microsoft have bought Yahoo? Clearly, it could have done – for more money:

In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.

It follows that the withdrawal of the offer is a strategic decision, not just a victory for Yahoo, its insistence on a higher price, and its dalliance with Google.

I suspect many voices within Microsoft were saying that the deal would not deliver the benefits the company sought – namely, to pull closer to Google in the search market.

We are also seeing some interesting internal developments, from Silverlight to Popfly to Live Mesh – that suggest Microsoft does have an internet story, albeit still an uncertain one.

I wonder how this saga will look twelve months from now?