It’s official, Microsoft (MSFT, $29.24, down $0.16) has withdrawn it for Yahoo ($28.67, up $1.86). After going as high as $33 a share, Yahoo held out for $37 which Microsoft simply felt was too high. Microsoft’s decision to walk away from the table came Saturday after last-minute efforts to negotiate a mutually acceptable deal. I sensed Yahoo was going to be stubborn and that was questioned after Microsoft raised its bid late Friday. However, when it was all said and done Yahoo stuck to its guns as did Microsoft.

Here is what Microsoft’s CEO, Steve Ballmer had to say, “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.”

Yahoo’s Jerry Yang’s response, “With the distraction of Microsoft’s unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history.”

It was a surprise ending and I compared the drama to a script out of Hollywood. And we all know how Hollywood works. This story is bound to have another sequel (Microsoft tried to buy Yahoo once before) so we could see a “Microsoft/ Yahoo 3″.

As for now, there will be interesting subplots. What happens to Yahoo’s stock price? Is something in the wings with Google? If Yahoo’s stock drops back into the teens will Microsoft start buying shares in the open market? Does Microsoft look elsewhere for a partner…ValueClick (VCLK, $19.93, down $0.19)?

One thing is for certain come Monday. All three stocks will be very active.

Rick Rouse
Rick@OptionsMentoring.com

Well, well, well. It appears Microsoft’s (MSFT, $29.24, down $0.16) Steve Ballmer is not a man of his words. For someone who had said that Microsoft wouldn’t raise its offer for Yahoo (YHOO, $28.67, up $1.86) because the original offer was “fair”, Mr. Ballmer is now willing to pay not a “dime above” but $2 more to get a deal done. I say “not a dime above” because that is what he had said on Thursday.

Talk is cheap and while the news is good for Yahoo’s shareholders it lowers the drama factor. Not that I was hoping for Yahoo’s stock to drop or anything but it would have been (and still could be) interesting to see what would’ve happened had Microsoft walked away. Nothing is official but this brings the two that much closer.

Like something out of Hollywood both companies have followed the script to a “T”. But like any movie that drags on after an exciting start most people just want the thing to hurry up and be over with. Yahoo was up another $1.03 to $29.70 in after-hours trading while Microsoft shed another 12 cents.

Rick Rouse
Rick@OptionsMentoring.com

Microsoft (MSFT, $28.78, up $0.25) is reportedly willing to pay up to $32-$33 for Yahoo (YHOO, $27.79, up $0.37) in what may be its last attempt to get Yahoo’s stockholders to pressure the board to sell. Yahoo’s board wants a deal done in the “upper $30s.” The original deal was for $29 a share.

The news is obviously Microsoft’s way of letting it be known that although it is willing to pay a few dollars more per share, a hostile bid is in the wings.

There is a method to Microsoft’s madness. I believe they let it be known that they are “willing to throw in a few extra dollars” which makes it look like they are willing to go higher but not at Yahoo’s price. You know Microsoft underbid it’s first offer although it was about a 60% premium from where Yahoo’s shares were trading at the time. Yahoo is expecting a 100% buyout premium which is sometimes the norm.

Look, Microsoft basically has four options. Raise the bid, lower the bid, walk away, or go hostile. By raising the bid, it looks good for business. Lowering the bid wouldn’t look good to Yahoo’s shareholders but Microsoft would get that in essence if it did walk away. Yahoo has one option which is to take this latest offer. The pendulum has swung in Microsoft’s favor.

Yahoo has no other offers on the table. Plain and simple. If Yahoo keeps denying Microsoft (which is my gut feeling) then the stock will plummet. Then again, this hasn’t seemed like a good fit from the start. Maybe if Yahoo had said “yes” right off the bat then, maybe, I would have believed this merger would work. It still may but think about it, they have already lost three months of working together by working against each other.

The companies are about $4 apart in price. Microsoft is loaded with cash and could easily do the deal but some believe Microsoft is already over-paying for Yahoo. With this latest offer, Microsoft clearly has the edge and has had the leverage from the start to make this as smooth as possible. For some reason, Yahoo is fighting tooth-and-nail and I think its a big mistake on their part. Meanwhile, Google (GOOG, $585.00, up $10.71) is up again today.

The tension is building and a resolution is nearing. The companies are working overtime and we should get a better feeling for where this is headed by the weekend. If Yahoo doesn’t do something soon though its stock will get beat down like a rented mule.

Rick Rouse
Rick@OptionsMentoring.com

10:00AM

(MSFT, $28.69, down $0.30) and Yahoo (YHOO, $26.22, down $0.21) continue to trade lower today. Microsoft lost $0.84 yesterday while Yahoo fell $0.37. With no deal in place in only makes sense that both stocks have suffered. I can only imagine what Microsoft’s “war room” is planning next. As each stock falls lower, Google (GOOG, $554.34, up $2.22) continues its uptrend (the stock was up $8 Monday) and has to be loving every minute of this battle.

MasterCard (MA, $265.62, up $23.12) is hitting 52-week highs this morning after reporting profits more than doubled during its latest quarter. I have been telling you that stocks can often see swings of 8%-10% or even 20% on earnings announcements. Yesterday, the stock closed at $242.50 and if you would have factored a 10% move either way you would have gotten roughly $266 to the upside and $218 to the downside. MasterCard is up nearly 10% today and the May 270 calls (MALEX, $6.80, up $4.20) are up 160%. On the other hand, the May 220 puts (MALQD, $0.20, down $3.30) fell 94% on the news. See why betting on earnings can be so risky? If you had predicted MasterCard’s stock would suffer after a lousy report or bad market conditions then you would have basically lost your entire investment overnight if you had bought the puts.

Now, if you would have placed what is called a “strangle” option trade and bought equal amounts of the May 270 calls and the May 220 puts, then you would have came out slightly ahead. The previous close of the calls were $2.60 and the puts were $3.50. This gives you a total cost of $6.10. If you were to sell both of these positions now, you would get roughly $6.80 for the calls and maybe $0.20 or $0.15 for the puts for a total of about $7.00. That’s roughly a 10% gain in one-day just by hedging your trade. Sure, it may not pack the power of getting you a 100%-200% gain but it also protects you from losing all of your money on a trade.

Sohu.com (SOHU, $70.82, up $0.01) was up $9 yesterday and I had mentioned that they may be one of the better China Internet plays. The May 70 calls (UZKEM, $7.30, unchanged) were up nearly 150% after earnings quadrupled on strong advertising and online game revenue. Online gaming continues to grow at mind-boggling numbers as online video games are expected to triple by 2012 according to some industry analysts.

One last tidbit…Ballard Power Systems (BLDP, $4.16, up $0.06) is a fuel cell manufacturer that makes equipment for hydrogen production. The company announced earnings this morning but the stock isn’t getting much of a pop. Hard to believe this was a $125 back in the day…

Rick Rouse
Rick@OptionsMentoring.com

The weekend has come and gone without a deal getting done between Microsoft (MSFT, $29.83) and Yahoo (YHOO, $26.80). Microsoft had given Yahoo’s board of directors until Saturday to agree to its proposal or face a the possibility of a tender offer and proxy battle. Although Microsoft hasn’t revealed its next move, I would expect some kind of response within the next day or two.

The stakes are high for both sides and Microsoft has already hired a major proxy solicitation firm. It has also been reported that the company has prepared its own board of directors to replace Yahoo’s board, so we’re likely to see Microsoft pursue the deal.

On the other hand, questions abound as to if this deal is what’s best for Microsoft. It has been leaked that Microsoft’s higher executives do not want this deal to go through and mergers are always a tough thing to get done anyway.

If Yahoo is successful in fending off Microsoft then shareholders are going to want to see results. Will Yahoo’s stock hold up if Microsoft walks away and what will happen to Microsoft’s shares?

In the meantime, the one company that is benefiting the most is Google (GOOG, $544.06) which is the same company that both Microsoft and Yahoo are trying to catch.

Rick Rouse
Rick@OptionsMentoring.com

The clock is ticking on Yahoo (YHOO, $26.59, down $0.71) to accept Microsoft’s (MSFT, $29.73, down $2.07) bid. The deadline is Saturday and we’re likely will see some high action drama. The stakes are high for both sides but the real pressure is on Yahoo which really has no other options.

If Microsoft doesn’t get a deal done the company could go “hostile” with its bid. A takeover is considered “hostile” if Yahoo’s board rejects the offer and Microsoft continues to pursue the deal or if Microsoft would have made a bid without informing Yahoo’s Board beforehand then it would also have been considered a hostile takeover bid.

So what does this all mean? Yahoo’s isn’t opposed to a merger but wants a higher price. Both companies reported less-than-stellar earnings results so there is no leverage there on either side. Microsoft has said it will not raise its offer and Yahoo wants a higher one. It looks like its going come down to who’s word is the strongest and I’d go with Microsoft.

If that happens, then Yahoo could fall below $20. If Microsoft pulls out or goes hostile its stock could also slip as well. Here’s where it gets really interesting. The put volume in Yahoo is exploding and we are only halfway through the trading session.

Take a look at the action in the Yahoo May Puts:

May 25 Put (YHQQE, $1.04, up $0.40) up 63%, 32,000 contracts traded
May 22.50 Put (YHQQX, $0.54, up $0.24) up 70%, 16,000 contracts traded
May 20 Put (YHQQD, $0.24, up $0.12) up 100%, 23,000 contracts traded

Before I close, let’s throw this out there. What if Microsoft pulls out of the deal sending Yahoo’s shares down below $20? If that were to happen the stock could fall even further to the low to mid-teens where Microsoft could then aggressively buy Yahoo’s shares in the open market for half the price.

I can’t wait to see how this all unfolds.

Rick Rouse
Rick@OptionsMentoring.com

10:00AM

Microsoft (MSFT, $29.95, down $1.85) dropped the ball on its latest earnings report and the stock is taking a hit. Shares are currently trading below $30 after the company reported that earnings per share fell from $0.50 to $0.47 on revenue of $14.45 billion. The numbers were slightly higher than Wall Street estimates of $0.44 a share on $14.4 billion in sales.

The company also issued guidance for the current quarter for a profit of $0.45 to $0.48 a share, which only matched Wall Street’s current view of $0.48. This and the fact that sales of its Windows software fell 24% to $4 billion are some of the reasons the stock is down 5%. Although this was a pretty solid quarter, earnings per share would have been worse if Microsoft hadn’t aggressively bought back its shares.

This leads us back to Yahoo (YHOO, $26.69, down $0.61). Microsoft reiterated in its conference call that it would not raise its bid for Yahoo but continued losses in Microsoft’s online division - which it plans to merge with Yahoo - swelled to $228 million from $171 million in the same period last year.

These results suggest that Microsoft could certainly use Yahoo but with a deadline of Saturday for a deal to get done, it’s looking more and more like Microsoft could walk away which is why Yahoo’s stock is feeling some heat.

Rick Rouse
Rick@OptionsMentoring.com

When Microsoft (MSFT, $30.01, up $0.79) announced plans to buy Yahoo (YHOO, $28.51, up $0.48) back in February the stock was trading for $32.60. Sure, you can expect a drop in the acquiring company’s stock price and a premium in the company that is being acquired. After analyzing the deal, a week later I thought the Microsoft July 30 calls (MSQGF, $1.81, up $0.35) looked good for a longer-term option play. The calls were selling for $1.75 or so at the time. My reasons were simple. I thought the market had pushed Microsoft down to far at $28.

Much has happened since as you can follow the articles on the situation here:

http://www.optionsmentoring.com/stockoptions/index.shtml

Two weeks ago, Microsoft gave Yahoo until April 26 to accept its current offer and that day is approaching quickly. Microsoft has said it would launch a hostile takeover at a much lower price if the deal doesn’t get done. And the way things are looking, it doen’t appear if Yahoo is going to except.

The July 30 calls have traded as low as $1.00 since I profiled them and as high as $2.10. Today’s move above $30 is the first time Microsoft has traded above this level since the announcement. I had been hoping for a quicker recovery but that is why I went further out to the July calls to allow for more time.

If this deal doesn’t go through by next weekend, Microsoft’s stock could continue higher while Yahoo’s shares could have a real possibility of falling back into the teens. Also noteworthy is that Yahoo reports earnings on Tuesday while Microsoft reports Thursday.

The markets are having a tremendous week with the Dow, Nasdaq, and S&P 500 all up. Certainly we got some great earnings reports this week which has carried the market higher but I’m curious to if the gains will hold. The S&P has challenged the 1400 level three times now this year and has failed to break through. Either we break through this barrier or it will be another faded rally.

Rick Rouse
Rick@OptionsMentoring.com