While Yahoo! Inc. [YHOO] shares nosedived Monday morning on news that Microsoft Corp. [MSFT] has ended its pursuit of the company, investors in the software maker appeared to breath a sigh of relief. Microsoft shares climbed as much as 3.4% after the opening bell.

After all the rumblings late last week that the two companies were  $31 per share price tag of Microsoft's original offer, concerns arose that the Redomond, Wash., software giant would spend too much.

"We think [Microsoft's] decision not to overpay for [Yahoo!] was the right one and MSFT may get another opportunity to acquire YHOO down the road," says Avian Securities LLC analyst Matt Bryson in a research note today.

Whether Microsoft has really quit its pursuit of Yahoo! is an open question. More certain is that CEO Steve Ballmer now must show that abandoning the deal was the right move. Bryson suggests that to close the gap with Google Inc. [GOOG] the software maker should focus on developing new products rather than try catch the search giant in areas where Microsoft lags. "We think MSFT should spend its money on developing the next generation of Internet apps in the areas of video and mobile rather than try to catch up to GOOG directly," he says.

Bryson has set a price target of $39 per share on Microsoft shares. -- Olaf de Senerpont Domis

See May 5 story on Yahoo!'s share performance from Tech Confidential
See May 5 post on what's next for Microsoft from Tech Confidential
For more on Microsoft's strategy see The Wall Street Journal, TechCrunch and the Los Angeles Times