Talks broke down between Microsoft and Yahoo today. Microsoft, after increasing their bid to $33 per share or $47.5 billion and still being rejected, decided to withdraw the offer. Read the TechCrunch coverage, press release, and letter from Steve Ballmer to Jerry Yang. It appears that Yahoo wanted something more like $37/share.

And, it looks like things won’t go hostile either. In his letter, Ballmer points to the measures that Yahoo apparently threatened in making themselves undesirable in the interim of a proxy fight, mainly a proposed partnership with Google.

So, as I predicted on May 1, the best strategy for Microsoft in this case at this time was to walk away. Give it a quarter or two, things will be more bleak for Yahoo, and then swoop in with a lower offer. Microsoft will end up looking like the sly dealmakers and Yahoo will look naive. I have a feeling we haven’t heard the end of this, but it may take some time, time that I do not think either of them has.

Updated on 5/4:  Here’s Yahoo’s Press Release: http://yhoo.client.shareholder.com/press/releasedetail.cfm?ReleaseID=308131