Microsoft has abandoned its effort to purchase Yahoo for $44.6 billion. Yahoo vigorously rebuffed the offer, first launched in February. In announcing the withdrawn offer, Microsoft CEO Steve Ballmer disclosed that the company had increased its initial bid.

“Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer. After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal,” Ballmer said in a statement.

This deal would have moved Microsoft far deeper into a Web Advertising market in which it has trailed both Google and Yahoo. Viewers suggest it well could have shifted the company’s emphasis away from its successful software businesses.

It is not completely certain that the merger machinations are wholly over - as Ballmer’s comments point primarily to pricing as the obstacle to completing the deal. Both Microsoft and Yahoo in the wake of this clumsy dance of courtship.

Some comment from the blogosphere:

According to Stephen Bainbridge. Big shareholders wanted a deal, “but not one that required Microsoft to overpay. In addition, press reports suggest that some of Microsoft’s largest shareholders were pressuring the firm not to overpay.”

Andrew Brust says it’s not over ‘til it’s over. “Microsoft’s withdrawal of its Yahoo acquisition proposal may just be a negotiating tactic.  Or it could in earnest.  Time will tell.”

And, the crack blogger MiniMicrosoft chimes in as well. “With this strategic inflection point, the era of post-BillG Microsoft 2.0 has begun.”

Microsoft’s recent discussion of mesh computing raises a few questions. For some details on what it is, go to the LiveMesh pages. The company has rattled about a lot of ‘Live” initatives, but this may be the first one with legs. Now, we are going to drop the mesh term immediately, and start to use ‘Cloud’ to describe whatever it is Ray Ozzie has been concocting - it is a more widely used term. Just think of it as a Grid on steroids, or rather a subset of a Grid on steroids.

Now the questions.

Who will the Microsoft Cloud effect? Seems like consumers are the target. It appears for now a way to connect one’s different electronic files and such. It may sneak into the enterprise, of course, just like Lotus 1-2-3 did.

Will it work? The answer there is yes, it will work about as well as most software; meaning, it will work much of the time, but you will come to curse it on occasion. Does IT have higher standards than individuals do on the question ‘does it work?’ - well, that is an open question.

Who is the competition? Basically, it is the nemesis called Google. Google has its own Cloud computing solution a’brewing, and Microsoft will have to meet the Valley Search Wizards of Googledom on that plain of battle because…well, because that’s what they are supposed to do. This is not mano on mano, no. It is geek-o on geek-o.

Of course, a wild card in the Cloud race is Yahoo. As you may recall, Microsoft is courting Yahoo with all the ardor of a CPA romancing a distant society deb. It is hard to guess how that will play out, but there is much about Yahoo that Microsoft will have to come to grips with. Yahoo has its own Cloud computing initiative - it has a lot of computers sitting around down on the farm, you know - which, like a lot of things at Yahoo, does not exactly work the same way as the Microsoft cloud alternative. As Blogster Par Excellance Mary Jo Foley points out, meshing these two platforms could be a real mess. Well put, Foley!

It’s been a few days since we checked up on the ongoing Microsoft-Yahoo saga. It’s beginning to look a lot like a soap opera after all.

• Microsoft has hired a law firm that specializes in proxy fights, which would in all likelihood see it try to oust the existing Yahoo Board of Directors and replace it with a board more sympathetic to its original offer of $31 a share. Hiring a firm for a proxy fight is seen as a much cheaper offer than upping the original offer for Yahoo. (BBC News)
• Both Chairman Bill Gates and Senior Vice President Yusuf Mehdi have affirmed their support for Microsoft’s bid for Yahoo. Gates added that the company will focus its efforts on search even if the Yahoo bid doesn’t go through. (Reuters via InternetNews.com and CNET News.com)
• It turns out that many Yahoo shareholders also own Microsoft shares. This means they support they deal no matter what happens. (The Register)
• Yahoo’s board appears to be divided, with some members worried that CEO Jerry Yang’s vehement opposition to a Microsoft takeover is clouding his judgment of what might me best for the company. At the same time, the board appears to have cooled on partnering with News Corp. (NewsFactor Network) 
• Finally, Yahoo has drafted compensation packages for employees who happen to lose their jobs up to two years after the company undergoes a change of ownership. (CNET News.com)

Now back to your regularly scheduled programming.

Another day, another batch of Microsoft-Yahoo stories.

• Initially rumored to be purchasing Yahoo outright, New Corp. is now said to be seeking a partnership with Yahoo. News Corp. would get a 20% stake in Yahoo, and the latter would in exchange get the former’s Web properties, which include the lucrative MySpace, as well as some private equity. (The Register)
• Henry Blodget thinks the News Corp. proposal is bringing the advantage back to Microsoft. Why? Yahoo’s getting desperate, and its alternatives aren’t terribly attractive either. Of course, Blodget surmises, Microsoft could just say the heck with it and try to buy Faceook… (Silicon Alley Insider)
• It doesn’t help that Yahoo made good on its promise to lay off 1,000 employees — well, more like 1,100. As both Mary Jo Foley and Dare Obasanjo point out, these layoffs weren’t exactly redundancies — there were some pretty talented people in the bunch. Both wonder if this means Yahoo is trying to make itself look less attractive to Microsoft. Nonetheless, there remains plenty of talent at Yahoo, talent that Microsoft would be daft to dispose of. (CNET News.com for both)

On that note, happy Valentine’s Day.

Did you really think the stream of news would die down because Yahoo rejected Microsoft’s buyout bid? Really?

Here are the story lines that have emerged since Yahoo made its announcement Monday morning.

• Ina Fried remains on top of this story. Her latest chapter examines Microsoft’s acquisition history, from WebTV and Hotmail in the late 90s to this year’s FAST purchase. There are two key differences between those acquisitions and the Yahoo bid — those companies were much smaller than Yahoo, and they offered services that did not overlap with what Microsoft already did.
• Yahoo investor Legg Mason wants Microsoft to raise its offer, simultaneously suggesting that Microsoft’s initial bit undervalues Yahoo and that Yahoo has few options left. (Reuters via InternetNews.com)
• Perhaps embracing the “anything you can do, I can do better” mantra, Yahoo expanded its mobile services and inked a deal with T-Mobile. Recall that, earlier this week, Microsoft expanded its mobile development platform and bought Danger Inc., maker of the Sidekick mobile phone. (InternetNews.com)
• Speaking at the Office Systems Developers Conference, Bill Gates said Yahoo gives Microsoft scale so it can take on Google. Raise your hand if that surprises you. Anyone? (ENT News)

We’ll let you know if anything else happens.