For starters, Microsoft Corp. Chief Executive Steve Ballmer looks to be backpedalling furiously, trying to reduce the impact of the deal falling through. Wall Street Journal quotes Ballmer as saying in an interview that he is confident that his company can build a competitive online-advertising business without buying Yahoo Inc., but that it "could just take more time." His comments follow remarks he made earlier in the day to an assembly of Microsoft employees at the Redmond, Wash., headquarters. At the employee meeting, Mr. Ballmer told staff that he wouldn't pay "a dime above" what he thought Yahoo was worth...his remarks to employees and in the interview appear to be an effort to build a case for backing away from the deal.

Secondly, a Yahoo-Google Ad deal looks all set to be announced. Also from the WSJ, Yahoo Inc. could announce an agreement to carry search advertisements from Google Inc. within a week as it braces for Microsoft Corp. to abandon its unsolicited acquisition offer or go hostile, say people familiar with the matter. While a broad search ad pact would likely attract intense antitrust scrutiny, the options Google and Yahoo are discussing include a nonexclusive arrangement that they believe could satisfy regulators, say the people familiar with the matter. The basis of such an arrangement would be a real-time auction system that would choose the most lucrative ads for any given consumer query from among those sold by Yahoo, Google and any of their competitors.

OK, I'll admit that mixing up ads from different companies to display the most lucrative ones is a perfectly sensible way of increasing revenues from search queries. And, like the article says, it'll help keep the anti-trust dogs at bay. Only problem I see is that when you compare the upside of this deal being announced against the downside of a Microsoft-Yahoo deal being scrapped, I can tell you for sure that Yahoo shares will be scraping the bottom within days of these announcements.

That's because the Yahoo-Google ad deal doesn't provide instant gratification, and Wall Street will have to wait for the next quarterly results after the new ad system kicks in to decide if its a profitable arrangement. Let's say Yahoo does announce the ad deal in the next few days. Microsoft, for its part, seems to have lost the will for a hostile takeover. So that leaves two options - Increase the bid price, or get out of the bidding. No way you can compare these two developments and say that Yahoo share holders will keep quiet. They'll raise a ruckus and force the Board to open negotiations with Microsoft, and also expect the board to continue finalizing arrangements with Google for the ad deal.

So, after looking at it from all angles, I think I can safely say that Yahoo is digging a deeper hole for itself here. Before, they just had to worry about the share price dropping if they say no to Microsoft. Let's say, for speculation purposes, that the ad deal with Google does get finalized, and search revenues start going up. In due course, Microsoft then finally gets control of Yahoo. Now what happens if they scrap the ad deal with Google? Search revenues tank immediately. So they can't do that, at least not in the near future.

As per this scenario, Microhoo will have the infrastructure of Yahoo, under Microsoft management, with ads mostly served by Google. Note to Yahoo - Stop digging before you add a couple more companies to this soap opera. Jerry Yang must be missing the good old days when all he had to worry about was how to turn around a failing internet behemoth with 14,000 employees spread across the globe and a portal with the largest visitor base in the world.