According to a story by Ina Fried in CNET's Beyond Binary blog, Microsoft has rescinded its offer to purchase Yahoo. In early February, Microsoft offered Yahoo $31 per share (see "Microsoft Bids $44.6 Billion for Yahoo," 01-Feb-08). Although speculation about the offer provided fodder for innumerable news stories and blog posts, in the end, it came down to money. Microsoft upped its offer to $33 per share, adding another $5 billion to the purchase price, but, according to Microsoft CEO Steve Ballmer's letter to Yahoo CEO Jerry Yang, Yahoo's board of directors held out for $37 per share, a level to which even Microsoft wasn't willing to go. In theory, Microsoft could have taken the offer directly to Yahoo's shareholders, but Ballmer felt Yahoo would take steps during the process (most notably, forge a closer relationship with Google) to make the company undesirable as a takeover target for Microsoft.
So we're back to where we started, with Microsoft still looking for ways to fend off the hard-charging Google while still raking in $14.1 billion in profits on $55.1 billion in sales in 2007, making it the most profitable technology company according to Fortune. That's well ahead of Google ($4.2 billion in profits) and Apple ($3.5 billion).
Whatever problems Yahoo may have had before, the company's handling of the Microsoft offer would seem only to have worsened them - see Kara Swisher's report on the mood of Yahoo executives in All Things Digital.