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Here's why:

Microsoft's squishy quarter makes it less likely that Microsoft's rising stock will raise the value of Microsoft's bid on its own. (Ironically, of course, as the deal becomes less likely, Microsoft's stock will rise because of that--but we assume Yahoo is smart enough to know what would happen if it suddenly agreed to a deal.)

Yahoo has dug itself in deep enough that we don't see the company caving and agreeing to sell at this price--especially in the next two days. Jerry has demonstrated that he's not easily spooked, and he has to have been prepared for the possibility that Microsoft would walk. In fact, we think Jerry would see this as a victory (which it would be) even if many Yahoo shareholders do not.

We think lots of Microsoft shareholders and Microsoft employees hate this deal--as well they should, because it would be a disaster. We think the complaints and concerns about the deal expressed to Steve Ballmer over the past two months have probably made him think twice about the wisdom of fighting to the death for Yahoo, even if he'll never admit that. At the very least, they'll make it easier to walk way.

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Microsoft's public statements have now gone beyond threats to what appears to us to be acceptance and resignation. Maybe we're just falling for a negotiating tactic, but we don't think so (and if that's what it is, we think it's a dumb one). If Microsoft is going to seriously consider raising its bid next week--which, based on Yahoo's behavior, we think is now the only way to get this deal done quickly--it sure isn't acting like it. Cutting the price, meanwhile, would make it even harder for Microsoft to win a proxy battle.

Eight weeks ago, we thought this was pretty much a done deal. We thought the companies would find common ground at around $35 and that an agreement would be reached relatively rapidly at that price, once Yahoo exhausted all its options. Now, based on the positions taken by both companies and the first quarter results, we think there's less than a 50% chance the deal will get done. At least in this go-round.

Disclosure: Henry Blodget has long-term positions in both MSFT and YHOO.

See Also: Microsoft's FQ3 Mixed, Walking From Yahoo Now More Likely