Microsoft has dropped its three-month-long pursuit of Yahoo, ending a historic acquisition attempt whose failure takes Microsoft back to square one in its quest to boost its online business to better compete against Google.

"We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo, and the market as a whole. Our goal in pursuing a combination with Yahoo was to provide greater choice and innovation in the marketplace and create real value for our respective stockholders and employees," said Microsoft CEO Steve Ballmer in a statement distributed early Saturday evening.

[ For the complete saga of Microsoft's unsuccessful bid to take over Yahoo, check out InfoWorld's special report. ]

Microsoft had raised its initial bid by about $5 billion, or to $33 per share, but that didn't convince Yahoo to accept the revised offer, as Yahoo wanted $37 per share, Microsoft said. "After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," said Ballmer.

In response, Yahoo issued a statement reiterating its position that Microsoft's offer was too low, and saying that many Yahoo shareholders agreed with its position.

"Yahoo is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market," Roy Bostock, the chairman of Yahoo's board, said in the statement.

Yahoo CEO Jerry Yang said that "with the distraction of Microsoft's unsolicited proposal now behind us" Yahoo can continue with "the most important transition in our history."

All parties with a stake in the deal had been waiting for Microsoft to announce its next move, after Yahoo failed to agree to a deal by last Saturday, the deadline Microsoft had set three weeks earlier.

But Microsoft stayed silent for days, as observers speculated whether it would walk away or prepare a hostile takeover. However, on Friday anonymously sourced reports in The Wall Street Journal and The New York Times said that Microsoft and Yahoo had turned a corner and were for the first time negotiating merger terms in earnest.

Ultimately, it seems that Microsoft's management, fatigued by Yahoo's resistance and demands, decided that engaging in a proxy fight to oust Yahoo's directors would be an arduous and nasty process. After all, for Microsoft, the goal of the massive acquisition was to quickly become a mightier competitor to Google in online advertising.

"This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft," Ballmer wrote in a letter he sent Saturday to Yang.

As soon as Microsoft announced its bid for Yahoo on Feb. 1 -- valued at $44.6 billion at the time -- Yahoo's management began seeking and considering alternatives, while its stock began to rise from the latest pre-bid price of $19.18.

By the time Yahoo's board formally rejected the unsolicited offer on Feb. 11, saying it undervalued the company, Yahoo's stock price had risen to $29.87, erasing the offer's premium. The next day, Microsoft hinted in a letter to Yahoo that it wouldn't shy away from attempting a hostile takeover.

Meanwhile, several media reports appeared -- all attributed to anonymous sources -- that Yang was holding conversations with Google, AOL, Disney, and News Corp., exploring alternative deals that would strengthen Yahoo's business and thus relieve the pressure to accept Microsoft's offer.