Suppose Steve Ballmer says “Never Mind!”? That’s been the speculation about the proposed Yahoo deal since the deadline Mr. Ballmer set for an agreement passed last Saturday without any visible action on either side. The most likely immediate market reaction would likely be a sharp drop in Yahoo’s shares, which traded Monday morning  at around $27. Before Microsoft’s offer on January 31, Yahoo’s shares were trading at $19. As for Microsoft, its share price could get a boost; shareholders haven’t been convinced the acquisition of Yahoo would be such a good thing. There have been reports of some internal dissent at Microsoft about a merger distracting management at a critical time for the company.

Some of those issues surfaced in Friday’s earning report and Microsoft’s cautious outlook for the next quarter. Adjusting to “cloud computing” has been hard work and Microsoft is not at the forefront of software offered as services on the Web. Microsoft’s share dropped 8 percent Friday after issuing its results.

CFO Chris Liddell perfunctorily rattled the sabers during his earnings call last Thursday. "Unless we make progress with Yahoo towards an agreement by this weekend, we will reconsider our alternatives," he said. "These alternatives clearly include taking an offer to Yahoo shareholders or to withdraw our proposal and focus on other opportunities." Microsoft must decide whether to take on a full-scale proxy battle to acquire control of Yahoo. Chances are that Yahoo shareholders realize this is the best deal they’re likely to get unless NewsCorp’s Rupert Murdoch or Time-Warner’s Jeff Bewkes emerges as a white knight, a role neither man is well cast to play.  If Yahoo;’s stock sinks, Microsoft could end up getting it for a lot less than the $41 million it originally offered.

The issue with any hostile software deal is how you retain the key intellectual talent. While the tech industry likes to say the talent can walk, experienced acquirers like Oracle’s Larry Ellison have shown they can retain talent with the right (financial) incentives. The important question is how it will all meld into an entity greater than the sum of the parts.

The biggest issue right now is the damage Mr. Ballmer would do to his own credibility. His reputation as a hard-charging executive suggests that retreat is not on his agenda.  However, he has been known to change course. In the mid-1990s, people in the industry amused themselves with footage of a Microsoft sales meeting from the days of the brief Microsoft-IBM alliance. On the tape, Mr. Ballmer bellows “OS/2 is the future of computing!” to a roomful of fired up Microsoft sales reps. Of course, a year later, the deal was off and Microsoft went on to use the best parts of IBM’s operating system to create Windows NT.

Mr. Ballmer has not started bellowing “Yahoo!” just yet. But if he decides Yahoo is not worth the fight, he may well find another target to give him the leverage he seeks in search advertising and Internet presence.