Microsoft officially withdrew its offer to acquire Yahoo, after Yahoo continued to hold out for a higher offer.  The fall-out from this decision has already begun.

AP Business writer Michael Liedtke reported Yahoo (YHOO) stock plunged 15% this morning, yet it is recovering some of its gains.

“The sell-off wiped out nearly half the gain in Yahoo Inc.’s stock price since Microsoft Corp. made its initial offer on Jan. 31 in an effort to challenge online advertising and search leader Google Inc. The downturn left Yahoo’s market value about $14 billion below Microsoft’s last offer.”

Liedtke also wrote a news story Sunday night which I found interesting, entitled “Yahoo CEO on the Hot Seat after Rebuffing Microsoft’s $47.5 Billion Bid“.

Liedtke, like so many others, anticipated a large drop in Yahoo’s price Monday morning:

“It will be a daunting challenge [to convince others his company is worth more than Microsoft offered], as Yang will be pointedly reminded Monday when investors are expected to show how little they think of Yahoo without a takeover bid on the table. Faced with resistance from Yang and the rest of Yahoo’s board, Microsoft withdrew its offer over the weekend.”

“Disillusioned shareholders are bound to question whether the rejection of Microsoft’s sweetened $33-per-share offer was driven more by emotion and ego than sound business sense.”

“Clearly there’s frustration,” said Darren Chervitz, co-manager of the Jacob Internet Fund, which owns Yahoo stock. “I am not even sure if Yahoo cares about its shareholders because they didn’t show much regard for shareholders’ best interests in this process.”

Let’s see the fall-out on the charts, which has proceeded as expected so far (expectation:   Yahoo plunges, Microsoft trades higher, Google surges higher):

First, the intraday action shows this to be the case:

Let’s look at their individual daily charts for any clues:

Yahoo Inc (YHOO):

Microsoft Corp (MSFT):

Google Inc (GOOG):

Remember that when there’s a take-over offer, the following pattern is expected:

Company MAKING the offer :  Usually Declines in a gap
Company BEING ACQUIRED:    Usually Rises (surges) in a gap

Also, any other companies directly affected move as well (for example, they were teaming up against Google’s search engine dominance).

In this instance, when a take-over attempt FAILS, then the unwinding of this pattern occurs, which is what we are seeing today.  Each stock also attempted a ‘gap fade’ after the initial overnight impulse.

This is such an interesting story, and one that has taken on new urgency now as the fall-out could be large from these developments.  Let’s continue to watch the situation unfold.