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Yahoo’s shares are getting hammered this morning, as investors reacted to Microsoft’s decision to rescind its $46.5bn bid for the internet company.

But according to Kara Swisher over at All Things Digital, a precipitous decline in market capitalisation might not be the worst thing Yahoo CEO Jerry Yang will have to deal with when he gets into work.

Says Ms Swisher: “The worst? That’ll be the very hairy eyeballs you will be getting from a lot more of your employees, who are scared silly and a lot peeved by the limb many feel you have dragged them and their stock options out onto.”

Meanwhile, analysts are busily slashing their recommendations on the stock, which fell as much as 20 per cent to $22.97 - a two-year low - in brisk trade in New York.

Citigroup’s Mark Mahaney cut his rating on Yahoo to sell from buy, and lowered his price target to $26 from $34.

Mahaney sees three potential scenarios for Yahoo, the least likely of which - with a 15 per cent probability - is Microsoft returning with a higher bid.

Somewhat more likely - 45 percent or so - is that Yahoo will return to business as usual, while the odds that Yahoo will strike a major outsourcing deal are around 40 per cent.

ThinkPanmure’s William Morrison, who cut his rating to sell from accumulate, and his price target to $20 from $31, says Yahoo’s rejection of Microsoft’s bid may go down “as one of the most destructive decisions for shareholder value in the history of Internet stocks.”
Ouch.