This evening, Microsoft withdrew its bid for Yahoo. According to CNN, Microsoft had offered as much as $33 per share ($49.6 billion) for Yahoo. Yahoo had been look for up to an additional $4-$5 billion. In my opinion, this is a good move for Microsoft.

Sometimes--actually quite often in the field of mergers and acquisitions--the best deal is that which is never made. The academic literature suggests that 70%-80% of acquisitions fail to create shareholder wealth. Some prominent disasters included the marriages between AOL and TimeWarner and Citigroup and Travelers, Inc.

In a quick and dirty exercise for illustrative purposes only, if one glanced at the financial statements of Microsoft and Yahoo, it appeared that even the $49.6 billion deal would have posed a risk of eliminating Microsoft's economic profits (assuming a cost of capital toward the higher end of a 10%-15% range, figures that are among those that have been publicly cited and are probably reasonable given that Microsoft's capital structure consists of all stock and no long-term debt).

Had the merger taken place, the combined earnings of the new enterprise would have amounted to approximately $14.725 billion. The invested capital of the combined company would have come to approximately $113 billion ($63.4 billion in Microsoft's common stock + $49.6 billion in the acquisition price). If one assumes a 10% cost of capital, the cost of capital would have come to $11.3 billion. At a 15% cost of capital, the cost of capital would have come to approximately $16.95 billion. If one added another $4 billion to the acquisition price, the cost of capital would have ranged between $11.7 billion and $17.55 billion. All said, especially if Microsoft's cost of capital were at the higher end of the range, the acquisition might well have eroded shareholder wealth rather than enhanced it, especially if Microsoft had agreed to Yahoo's desired terms.

Needless to say, a much more rigorous examination was undertaken by Microsoft and its investment bankers. However, I suspect that the numbers from the quick and dirty glimpse are in the proverbial ballpark. After all, Microsoft CEO Steve Ballmer walked away, noting that Yahoo seemed interested in an additional $4 billion-$5 billion for consenting to the acquisition, explaining, "After careful consideration, we believe the economics demanded by Yahoo do not make sense for us."

Nevertheless, sometimes deals have been left for dead only to revive again. It will be interesting to see if this proposed acquisition comes back to life at some point.