Microsoft walks out on Yahoo!; Bank of America may cut offer to $0 to $2; buyers look over Sprint

By Aaron Hochman-Zimmerman

New York, May 5 - Microsoft Corp.'s vain attempts to pull Yahoo! Inc. from its $37 per share perch pulled the shares of both companies lower along with the rest of the market, which suffered a losing day also fueled by disappointing assessments of Countrywide Financial Corp. and rising oil.

Bank of America Corp. fell after it said on Friday that it may not back Countrywide's debt. Many investors believe it may try to renegotiate the deal from over $7 per share to somewhere between $0 and $2 per share.

Also in finance, stocks were up as talk was heard about the return of Banco Santander SA for the remainder of Sovereign Bancorp Inc., which dropped slightly during trading.

Germany's Deutsche Telekom AG was lower as reports said it may be looking to ring up Sprint Nextel Corp., which traded higher on the news.

Still, others felt it more likely that Nextel's founder will mount a rescue operation to pull Nextel away from Sprint.

Elsewhere, shares of U.S. Airways Group Inc. and UAL Corp. were off altitude even as some expect a merger announcement before the end of next week.

Meanwhile, during the day's trading the Dow Jones Industrial Average ended lower by 88.66, or 0.68%, at 12,969.54, while the Nasdaq Composite Index gave up 12.87, or 0.52%, to finish at 2,464.12.

The S&P 500 slid 6.41, or 0.45%, to close at 1,407.49.

The Yahoo! that got away

On the first day of trading after Microsoft (Nasdaq: MSFT) went to the precipice with Yahoo! (Nasdaq: YHOO) and then Saturday turned around and walked away, Yahoo! shares sank by $4.20, or 14.65%, to $24.47.

For all of the posturing and threatening of a proxy fight, Microsoft's chief executive officer Steven Ballmer decided a war would be too costly. He had consistently left open the possibility of an outright retreat from the deal, but many market watchers believed that one day Microsoft would be the proud new owners of Yahoo!, especially after raising the offer to $33 per share.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer," Ballmer said in a statement on Saturday.

Yahoo!'s chief executive officer, Jerry Yang insisted that his company was worth at least $37 per share and on Saturday Ballmer finally took him at his word and left the table.

Microsoft shares dipped by $0.16, or 0.55%, to $29.08.

However, some of Yahoo!'s shareholders came to see a fight and may start one of their own rather than go home disappointed.

A portion of Yahoo!'s shareholders told CNBC that they may begin their own proxy fight to seat a different board, particularly because the company's founders, Jerry Yang and David Filo, went into negotiations without any advisors.

"I guess there are some shareholders that are not real thrilled," said Paul Martin of Martin Capital Advisors.

"I just may think Yahoo! could get up to the range that Microsoft was offering on its own," he said, adding that even with a failed deal Yahoo! closed almost $5 higher than its $19.18 close on Jan. 31, the day before Microsoft's offer.

"There's a decent chance we get a rebound in the market," he said and "I would think $37 may end up looking like a pretty good price for Microsoft," he said.

"Maybe the Yahoo! board made the right decision," he said, "That's the thing no one is talking about."

For the analysts who predicted success and those who predicted failure, the question remaining question is still: what will happen to Yahoo!?

The search engine has already danced a dance with the search big-shot Google Inc. (Nasdaq: GOOG), beginning with a trial advertising partnership on April 9.

Yahoo! has also held increasingly serious talks with News Corp. (NYSE: NWS) and the AOL section of Time Warner Inc. (NYSE: TWX).

The other question is, of course: what happens to Microsoft?

Few, if any foresee Microsoft's doom, but many have discussed its stagnation and inability to push ahead of Google in the internet and search race, although it still holds it standing in software.

Considering their history, "Microsoft should be able to do what they have to do on their own," Martin said.

Still, "I really think there's a chance Microsoft may be kicking themselves that they didn't buy Yahoo! at $37," he said.

Countrywide worth $0?

Meanwhile, shares of Countrywide (NYSE: CFC) dropped $0.62, or 10.37%, to $5.36 after Friedman, Billings and Ramsey cut their target price to $2 from $7 per share.

Bank of America (NYSE: BAC) shares fell $0.82, or 2.06%, to $38.97 as speculation mounted that the bank will likely try to renegotiate the deal to between $0 to $2 per share from over $7 per share.

"Given continued deterioration in [Countrywide's] loan book and weak pricing for non-agency loans in the secondary market, [Bank of America] could face $20 billion to $30 billion of loan write-downs when it closes the [Countrywide] transaction," wrote Friedman Billings Ramsey's Paul Miller in a research report.

"[Bank of America] will likely renegotiate the transaction down to the $0 to $2 level and force [Countrywide's] bond holders to absorb the remainder of the potential write-downs," the report continued.

A market source indicated that Bank of America is on the hunt for help from the Federal Reserve in the same order that JPMorgan (NYSE: JPM) was helped to acquire Bear Stearns.

"Countrywide has no choice but to do the deal," he said, adding: "The Fed will help Bank of America to get it done."

Santander back for Sovereign

Also in finance, a market source heard reports that Santander "will be back for the balance of Sovereign," he said.

Shares of Santander (NYSE: STD) were better by $0.11, or 0.51%, to $21.88 while shares of Sovereign (NYSE: SOV) were off by $0.25, or 3.06%, to end the day at $7.93.

Santander cut itself a $2.4 billion slice of Sovereign in 2005 and has been the subject of rumors in the meantime.

However, since the credit crisis took hold of the U.S. market, Santander had been happy to keep its distance rejecting further pursuit of Sovereign as late as this February.

Deutsche Telekom has Sprint's number?

In telecom, shares of Sprint Nextel jumped by $0.83, or 10.52%, to $8.72 as Deutsche Telekom (NYSE: DT), the parent of T-Mobile, began to see if the two could find a good connection.

According to the Financial Times, Deutsche Telekom, which is partially owned by the German government, is exploring many options for expansion.

Also, many believe a deal to create the largest cellular service provider in the United States would light up the lines of regulators.

Shares of Deutsche Telekom slid $ 0.18, or 0.99%, to finish the session at $17.93.

While most market watchers were talking Deutsche, another analyst felt more confident about the Wall Street Journal's report that Cyren Call Communications, founded by Morgan O'Brien who also co-founded Nextel, is attempting to rally capital in order to rescue Nextel from Sprint, a source said.

U.S. Air-United in days?

Also, shares of United Airlines (NYSE: UAL) were lower by $ 0.89, or 5.60%, to $15.00 and shares of U.S. Airways (NYSE: LCC) dropped by $0.40, or 4.59%, to $8.32 as the two seemed nearer to a deal on Monday.

The tangle of airline talks looked as though it may produce a proper knot tied between United and U.S. Airways within 10 days, according to the Wall Street Journal.

Still, regulators may fall short of handing out a merit badge for that sort of knot after the Justice Department put an end to United's try for U.S. Airways in 2000, the report said.

Although, "if we continue to see the market strengthening it will be set up to see more deals happening," Martin said.

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