Yahoo’s Fall Upends Stocks

Yahoo shares plunged Monday on news that Microsoft is abandoning its takeover bid for the company, dragging the rest of the market down with it.

The surprise was that Yahoo (NASDAQ: YHOO) shares fell “only” 15% to $24.37 on the news — still leaving $5 of Microsoft’s (NASDAQ: MSFT) buyout premium in the stock, as investors speculated that some kind of deal or partnership could still happen. Yahoo also could face a shareholder revolt — and indeed, several lawsuits and proxy battles were threatened or rumored on Monday.

Microsoft shares ended down slightly, as shareholders fretted that the software giant could make another run at Yahoo at what was already a high valuation.

Google (NASDAQ: GOOG) shares rose more than 2% on the consensus that Yahoo and Microsoft by themselves pose less of a competitive threat than “Microhoo.” Google could also benefit directly from the deal’s demise.

Microsoft CEO Steve Ballmer’s comment to Yahoo CEO Jerry Yang that Yahoo may soon “take steps that would make Yahoo undesirable as an acquisition for Microsoft” boosted speculation that Yahoo’s next move will be a partnership 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,” wrote Ballmer, who said such an arrangement would dilute Yahoo’s value.

Yahoo now faces the difficult task of reversing years of market share losses to Google while at the same time trying to restore the confidence of both investors and analysts — while possibly fighting shareholder lawsuits and proxy battles. It’s a tall order indeed, and the company will have to begin to show results soon. In one sign of how much work Yahoo has ahead of it, analysts have so far raised guidance only modestly despite the company’s upbeat earnings and guidance last month.

Also weighing on the market Monday was an analyst’s comment that Bank of America could walk away from its deal to buy Countrywide Financial (NYSE: CFC), but Sprint (NYSE: S) was a bright spot, jumping 10% on reports of interest from Deutsche Telecom (NYSE: DT).

Cisco (NASDAQ: CSCO) slipped 1.7% ahead of its results due out after the close on Tuesday. Analysts are looking for 10% sales growth to $9.75 billion and earnings of 36 cents a share, but investors will likely be hoping for more after the company’s disappointing quarter three months ago.

STEC (NASDAQ: STEC) was a big earnings winner, and AMD (NYSE: AMD) and Apple (NASDAQ: AAPL) also posted solid gains.

The Nasdaq lost 12 to 2464, the S&P shed 6 to 1407, and the Dow fell 88 to 12,969. Volume declined to 3.41 billion shares on the NYSE, and 2.09 billion on the Nasdaq. Decliners led by an 18-14 margin on the NYSE, and 16-12 on the Nasdaq. Downside volume was 58% on the NYSE, and 72% on the Nasdaq. New highs-new lows were 53-62 on the NYSE, and 63-99 on the Nasdaq.