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The plot thickens, the noose tightens, and when it comes to Yahoo and Microsoft, the "Little Merger That Couldn't," shareholders this morning, trying to climb this hill, are probably saying "I think 'I-cahn, I think 'I-cahn.'"

If that sounds like a silly reference to the children's book, "The Little Engine That Could," think how childish this saga has become: Corporate raider Carl Icahn discloses in a letter this morning to Yahoo

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[YHOO  Loading...      ()   ]shareholders that he has "frequently" spoken to Microsoft

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[MSFT  Loading...      ()   ]CEO Steve Ballmer about the prospects for a deal; that Icahn says Ballmer told him that if Yahoo's board is replaced, Microsoft is once again prepared to move forward with a "major" deal of some kind, along the lines of acquiring Yahoo's search business while providing significant financial guarantees. Details to come.

And if that sounds like typical Icahn hyperbole and bluster, I'm told that Microsoft is preparing to release a statement support Icahn's claims, that the two sides are in cahoots, and that Ballmer is using Icahn to do what Microsoft couldn't with its endless checkbook.

But let's look at this now from shareholder's, Yahoo CEO Jerry Yang's, Icahn's and Microsoft's perspective. First, shareholders: Yahoo shares are jumping this morning on the news. Whiplashed, whipsawed Yahoo traders smell opportunity in the water, the see some kind of deal and they're buying shares. The indication is that Icahn/Ballmer will win, that Yang will be out of a job, and that a deal of some kind gets done. Yahoo's big move this morning shows that Yahoo's investors appear to be putting their money where their mouths are, showing support for a "deal" while abandoning Yang and board. The troubling part for investors: these last minute fanaglings ahead of the shareholder meeting in a few weeks will come nowhere near the $33 or $34 for the entire company that Microsoft was originally offering.

From Yang's perspective: he botched this from the beginning, and sorry to say, when his life story is written, this will dominate the narrative and not in a good way. And now he stands a strong chance of being unceremoniously dumped from the company he co-founded.

Icahn? He's in the hole on his Yahoo investment. Doing better today, but still a ways to go to get back into the black. If he's lucky, he breaks even on his investment. Unless he's been given some kind of assurance from Microsoft that he's going to make a few hundred million if he can unseat the board. If Icahn's cost-basis is around $25 or $26, and he's got 68 million shares, look for a deal for the entire company in the $28 or $29 range. For Search alone, Icahn doesn't make back his investment, and I gotta tell you, Icahn isn't known for donating his time and efforts.

And from Ballmer's perspective: he wins, period. Microsoft has no net strategy. It needs Yahoo. It has the money to pay for it and needs to get a deal done. This has been sloppy from the beginning, but a deal's a deal. And gamesmanship comes in many forms. Also, if Microsoft can get this deal done, and for even cheaper than it was originally offering, in a quirky way, Ballmer is sticking to his fiduciary responsibility to his shareholders.

At least one of the CEOs in this soap opera knows how to do that.

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